THE FIRST BANK OF ISSUE.

The first bank of issue in Germany was the Prussian Bank, founded in 1765 and patterned after the Bank of England, which dates back to 1694. It is noteworthy that the reign of Frederick the Great not only brought into being the bank note system, but also laid the foundation of the whole modern fabric of banking as it exists on the European continent. Soon after the inauguration of the Prussian Bank, a so-called “Hofbank,” or Court bank, was started in the Margraviate of Bayreuth-Anspach, which operated as a dependency of the Prussian Bank during the brief period of Prussian sovereignty after the line of margraves had become extinct. The new head-quarters were at Fürth, with branch houses at Bayreuth and Anspach. In 1806, this bank of issue was removed to Nuremberg. In 1834, the Bavarian Exchange and Mortgage Bank was instituted at Munich, for the Kingdom of Bavaria; it emitted notes, and in conjunction with the German Imperial Bank it still transacts the chief exchange business of the Bavarian Kingdom.

The mortgage department of the Bavarian Bank was an adaptation from the Austrian National Bank, founded in 1816. In fact, the entire mortgage banking system originated in the time of Frederick the Great, and was gradually imitated in the other States of Europe in the next century. During the terrible distress of the Seven Years’ War, when all the genius of Frederick was taxed to provide means of defence against the armies of the Continent and the landed proprietors found their credit equally strained, an intelligent merchant conceived the idea of strengthening land credit through the instrumentality of provincial associations. In consequence of the necessities of the war, and of the low price of grain, the rate of interest for mortgages on landed estates had risen to ten per cent., and commission fees for the procuring of capital to two and three per cent. Frederick II. was compelled to grant the land-owners of the eastern provinces a respite of three years for the payment of their obligations.

LAND CREDIT ASSOCIATIONS.

In this condition of things, a Berlin merchant named Büring proposed to improve land credits by organizing joint responsibility associations of landed proprietors, on the theory that individual responsibility could be better secured through the collective pledges of a society of owners bound together by a mortgage contract. In 1767, Büring laid his plan before the Ministry, which rejected it. Thereupon, he addressed a memorial to the King direct, and the scheme now found favor. It was Büring’s expectation thus to strengthen credit through the agency of jointly responsible mortgage debtors, so that proprietors, instead of receiving at most one-half the value of their Edition: current; Page: [3] property, might obtain two-thirds of it in the form of mortgage bonds negotiable among capitalists. He designed also to extend his system to dwellings, in order that the advantages of similarly improved credit—enhanced by greater security, better guaranty of interest payments, and the feature of marketable bonds—might be enjoyed by tradesmen. Joined to this highly original proposition was a suggestion of the mercantile spirit; the author of the plan expressing the singular hope that “there should be no exportation of the bonds outside the country, so that interest need not be lost, nor the country become dependent on foreigners.”

The first land mortgage association was organized in 1780, in the Mark of Brandenburg; and the second, during the same year, in Pomerania. Others were established in West Prussia, 1787; East Prussia, 1788; and Posen, 1821. The new institutions were promptly imitated in the neighboring German States; and similar associations were formed at Hamburg in 1782; in the principality of Lüneburg, 1791; Esthonia and Livonia, 1803; Schleswig-Holstein, 1811; Mecklenburg, 1818, etc.

As complaints about the deterioration of land credits are of constant recurrence, it is interesting to learn from an eye-witness, Chancellor of the Exchequer Von Struensee, the depth of misery which prevailed in the eastern provinces of Prussia before the institution of the mortgage associations: “After the Peace of 1763,” says Von Struensee, in treating upon important questions of political economy, “conditions of credit for the eastern landlords—notably in Silesia—were sore perplexed. In regions where the armies had long been quartered, estates were laid waste, farm buildings burned, cattle driven away or starved, fields left untilled for years, and agricultural implements were in wretched ruin. The price of real estate fell to two-thirds or even one-third of its normal value; and many whose lands bore debts to the same amount had become insolvent. During the war, to be sure, and a short time after it, these conditions were veiled over, so to speak; nor did they declare themselves openly till some years from the Peace of 1763. While the war was raging, the land-owners had received high prices for their produce; they had paid taxes and interest with depreciated money, and, misled by this unstable, abnormal course of affairs, they had lived somewhat lavishly. Frederick regulated the currency immediately following the war, and creditors at once demanded their interest in sound money (in which taxes must also be paid), though the prices for crops were falling. Nobody cared to hoard ready money while the currency was depreciated by the war, and land-owners could easily effect small loans; but as soon as peace was assured, the smaller trades-people were eager to advance their business, and they generally called in the loans. Proprietors quite commonly borrowed capital during the war by giving legal promissory notes—indeed, they were glad to borrow in this way, so as to avoid furnishing mortgaged security, whenever possible. Upon every fresh acceptance they could congratulate themselves on holding estates unencumbered by mortgages. But now the creditors everywhere demanded either payment or Edition: current; Page: [4] mortgaged security; and the fact was patent that estates would be heavily indebted in comparison with their depreciated value—perhaps even hopelessly so. Without credit, the larger proprietors could not maintain themselves. He who owns an estate of fifty thousand dollars is badly off if it be cumbered with a debt of forty thousand; whereas the value of land quickly declines under poor harvests and sorry prices. Heavy damage may be also caused by cattle disease and hailstorms. In these circumstances, nobody was willing to make further loans to the Silesian land-owners. Surrender of effects became a common practice and threatened to be the general fate. Just then the mortgage associations were created, and the larger proprietors were again enabled to procure credit, through letters of mortgage.”

When these credit companies were first started, the matter of membership was optional in most provinces, though obligatory whenever a loan was concluded. In East Prussia, however, membership was required of every land-owner—entitling him, of course, to borrow capital if he so desired. The society bound itself by this twofold pledge in every district: on the one hand, to furnish every proprietor with an amount of capital equal to half the value of his estate; and on the other hand, to pay every creditor who held a bond ratified by the society not only the promised interest cash down and in punctual semi-annual installments, but also the principal itself on demand within six months’ notice. The process of raising a loan was as follows: The applicant addressed to the directors of the company a statement of the mortgage capital represented by his real property; then a valuation of his land was taken, and to make this as impartial as possible, certain fundamental rules were drawn up for every district, as terms of procedure, which might vary according to local conditions. From this valuation small cattle and agricultural implements were excluded. There were fewer loans on buildings than on land. When the estimated value of the property was fixed, the company’s agent delivered to the borrower an amount which, in most societies, represented one-half, in others three-fourths, of the assessed value, in the form of letters of mortgage, signed by him in the company’s name. These were not usually transferable, and were not exempted from accelerated final process. In these times, the nominal value of such letters of mortgage varies from 6,000 to 60,000 marks. Many bear the cautionary indorsement, “Not in circulation,” or “Inalienable”—as a protection against perverted use. These documents suffer less from political events than other commercial paper, and although handled at the stock exchange, they allow no play for jobbing. The manner of realization varies in the different provinces. In some places, the society delivers the desired letter to the borrower, and he may negotiate it as best he can; in others, a more expeditious method has been devised, costing him less time and expense—to wit, the society undertakes the sale of the letter of mortgage at the exchange, thus at once becoming the immediate creditor of the applicant and the debtor of the capitalist. It pays the interest when due, and is reimbursed by the borrower. Nearly all the modern mortgage credit institutions have adopted the Edition: current; Page: [5] latter plan. Some companies allow the debtor to clear himself by gradual redemption. Payments are made in annual installments, including interest, clearance fees, and administration charges; and these installments are proportioned to the full time of redemption, varying in the article of clearance rates from one and one-half to two per cent. For instance, this amounts to one per cent. in case of a respite term of forty years. More considerable partial payments are also accepted, and should one-fourth of the debt be covered, a corresponding reduction of the mortgage may be demanded.

Letters of mortgage are not to be recalled by the creditors; but they are marketed at the exchange, and in ordinary times are quoted from two to seven per cent. above par. Originally, the point that the bonds should not be recalled was not made statutory with respect to the bondholders; it became so, however, as the danger was gradually recognized, which might arise from a sudden accumulation of such advertisements. Creditors in want of money are referred to the exchange sales, which do them better service. Here, as a rule, they command more certain prices and receive prompter payment than the holders of private mortgage bonds. On the part of the credit companies, the letters of mortgage are generally redeemed in proportion to the partial payments made to them by their debtors. The bonds are secured by the mortgaged real estate, by the joint responsibility of the associated members, and in many places by the further guaranty of the State or province. The latter security is never employed, inasmuch as the sentiment of honor inspired by belonging to such trust companies proves effectual without it. Still, it serves to facilitate the sale of the bonds. The holder of a mortgage bond need not apply to the debtor for payment of interest, since that is paid by the society. As long as a mortgage debtor punctually pays his interest, the company has no right to give warning; but in case he delays, the managers are at liberty to resort to the following measures: “Whenever the appointed term has expired, and repeated warning has not been heeded, the mortgaged property or possessions may be attached, and held subject to the company’s control until principal, interest, and all the costs are covered.”

Other statutory provisions exist: for instance, an order may be issued for the sale of the mortgage, or the land-owner may be authorized to help himself by means of a lease. Again, the company has the right of raising a loan on the mortgaged land in the debtor’s name, until dispossession ensue or the debt be paid. The directors, nevertheless, hold the power to grant letters of respite in times of unforeseen distress, and thereby prevent the deterioration of the mortgage bond. In order to guard against vicissitudes, every mortgage association has a reserve fund, which is applied whenever there is occasion to purchase salable effects. All these institutions enjoy legal rights of exemption, prompt execution, freedom from stamp taxes and circumscription fees, as well as the privilege of obtaining capital from mortmain, communities, corporations, savings-banks, and minors’ trusts. Many of them, too, are endowed by the State. Frederick Edition: current; Page: [6] the Great thus furnished the province of Silesia 300,000 thalers at two per cent., which principal yielded interest at five per cent. to the province. The governing board of the mortgage associations is appointed by the members, though there is an associate State commissioner. The administrative expenses never amount to more than ¼ per cent. Interest on the bonds is by this amount lower than the interest paid by the mortgage debtors. Dietrici, sometime director of the Prussian Bureau of Statistics, mentions in praise of the system, that the value of mortgaged properties was most accurately and justly assessed, and the granting of loans was supervised with the utmost prudence.

The letters of mortgage even safely withstood the terrible times of the French invasion at the beginning of the nineteenth century. Letters of respite were indeed necessary in case of the interest payments, and there was a decline in prices, but after peace was restored they soon rose again to par value. Notwithstanding the competition of the mortgage banks, which were later organized side by side with the land credit associations, the total amount of mortgage bonds issued in the East Prussian provinces increased in round numbers from 160,000,000 thalers in 1805 to 250,000,000 thalers in 1848.

JOINT-STOCK MORTGAGE BANKS.

Joint-stock mortgage banks were the second form of landed credit institutions. They have attained a large growth in the course of this century. First founded in Germany, they were next adopted in Switzerland; and now in the latter half-century they have become common in France—le crédit foncier—and other European countries. They differ from the mortgage associations in the matter of joint responsibility, which is replaced by the feature of joint stock. And yet they draw the greater part of their trading capital from letters of mortgage, which they are enabled to put into wider circulation by virtue of their handsome capital and constant lending at the stock exchange and in the money market. These banks usually grant loans only on security supposed to represent a value double the amount of the loan, and only as first mortgage. The value of real estate to be mortgaged is ascertained by the bank attorneys themselves, the costs of valuation being borne by the borrower. The condition is often imposed, that any property destructible by fire must be insured. Some banks—for instance, the Bavarian Exchange and Mortgage Bank (Wechsel und Hypothekenbank)—pay out the loans in cash; others, like the German Mortgage Bank of Meiningen, agree to deliver the loan in letters of mortgage; being prepared, however, to effect the sale of the same on commission. Latterly, the plan of paying in ready money has prevailed, for the reason that most borrowers lose too much time and incur too much expense by individual sales.

No speculation by the joint-stock mortgage banks is allowed, though their unemployed funds may be put out at interest. They do a large business Edition: current; Page: [7] in the way of discounting bills and handling safe commercial paper, and especially in mortgage deeds. In almost all the German mortgage banks, the mortgage loans are irredeemable; they must be paid back by process of amortization, the same as in the case of the land credit societies. The partial payments are semi-annual; at the same time, the debtor has the right to pay more than the stipulated pro rata amount. To this irredeemable nature of the mortgage loans there are the following exceptions in favor of the banks: (1) In case the stipulated partial payments are not made. Ordinarily, several respites are appointed before the recall is enforced, and contingent, stricter measures are not applied until the lapse of the last period of grace. Then all the mortgage banks enjoy rights of prompt and simple execution. (2) Where the mortgage falls subject to sequestration or public sale; or any such procedure be instituted. (3) When the debtor becomes insolvent or even extrajudicially suspends payments. (4) When, by any accident or heavy indebtedness, the value of the mortgaged real estate so declines as to imperil the loan. (5) When the undivided mortgage comes into the hands of other owners, who do not immediately furnish proof that they have entered upon all the rights and obligations of their predecessors. (6) When a mortgage is partly transferred, and on account of the regulation of the mortgage claims no settlement has been reached. Such recalls are generally qualified by a respite of three months.

The nominal value of the letters of mortgage varies from 300 to 3000 marks. They are made out either to the bearer or to specified persons. On the conclusion of a loan, all the mortgage banks charge a commission fee, which never exceeds two per cent. The minimum amount of a mortgage loan at the Bavarian Wechsel und Hypothekenbank is 500 marks. The average interest on letters of mortgage is four per cent., and that on the loans four and one-half to five per cent. To the interest is added, in case of nearly all the mortgage banks, a partial amortization payment, which has already been mentioned, and which usually amounts to one per cent., sometimes even less. In practice, such properties are excluded from mortgage loans as, by reason of their dangerous uses, are not accepted for fire insurance; also those whose returns are uncertain or hazardous. Examples are: Powder mills, theatres, mines, quarries, and in some regions also vineyards.

The following statistical statements will illustrate the progress of the classes of institutions to which reference has been made in the foregoing pages:

From 1805 to 1815, 1825, 1835, 1845, and 1848, respectively, the debts charged in the land credit institutions of the above specified provinces rose in amount as per the following percentages:

CRÉDIT MOBILIER INSTITUTIONS—PRUSSIAN MARITIME ASSOCIATION.

When the plan of organizing the Crédit Mobilier was adopted at Paris in 1852, and so many like concerns were introduced in almost all the States of Europe, the stock-jobbers, who were at that time quite immoderately captivated by the French organization, had never a thought that an essentially similar establishment had been in existence for eighty years; namely, the Prussian Maritime Association, founded under Frederick II. in 1772. The Maritime Association, which must be regarded as the mother society of the crédit mobilier institutions in Europe to-day, was founded with a capital of 3,600,000 marks; and in 1810 it passed under State control. The association mainly busied itself with sundry State transactions; such as the acceptation and investment of State loans, the management of other Government business at home and abroad, purchase of transmarine salt, and even with such enterprises as contracting for public buildings. It furthermore engaged in the shipping trade; acquired real estate, mills, factories, etc., and managed all the business of discount and loan banking. Until 1836, the Maritime Association issued Treasury bills of 300 to 3000 marks, payable in cash to the bearer. Its exchange transactions in 1850, the period of the great increase of German banks of issue, still amounted to 25,000,000 marks. Down to our time, the Maritime Association has been charged by the State to negotiate loans; and it also serves to market Government effects in the shape of State bills, railway shares, and priority bonds—in a word, it does all the general mercantile and financial business of the Prussian Government. So this institution has continued its operations down to this day. During the long period of its activity, the old Prussian conservatism has proved highly advantageous.

Some fifty years after its inauguration, a Bavarian statesman, who subsequently became famous, addressed a memorial to the Prussian Government, wherein he proposed to found a credit institution little else than a duplicate of the Maritime Association. The valiant and worthy jurist had not so much as learned of the Prussian Maritime Association’s existence, half a century after it was founded. Thirty years later, when the brothers Péreire obtained a license from the French Government to organize the Crédit Mobilier and Crédit Foncier, and thereby made a great stir throughout Europe, nobody thought of the fact—perhaps not even the institutors themselves—that the new enterprise, in its statutory provisions, exactly Edition: current; Page: [11] resembled the Maritime Association. Times and circumstances, as well as the high-pitched speculations at the Bourse and the general stock-jobbing, which in turn influenced the press, brought about conditions the very opposite of those which attended the inauguration of the Maritime Association; for, in the course of a few years, crédit mobilier houses were started in all the Continental countries.

Our own survey, however, is limited to the German and Austro-Hungarian institutions. The most influential credit establishments of the German Empire at present are the Berlin Discount Company (Discontogesellschaft), the Bank of Trade and Industry at Darmstadt, the German Credit Company (Creditanstalt) in Leipzig, and the Middle German Creditanstalt of Meiningen. These companies are prohibited from issuing notes; on the other hand, they may discount bills of exchange, and carry on the business of encashment, custody of moneys, effects, and deposits, together with giving out exchequer bills in accounts current, payable on maturity, with days of grace or on call; they also buy and sell papers of value, as well as articles for which funds are deposited or security furnished. These banks make advances upon pledges of good paper, or of articles not classed as perishable. They are authorized to issue joint-stock bonds and priority bonds of anonymous companies, to purchase and sell the same again, and also to effect the reorganization of industrial enterprises into joint-stock companies. A considerable business has been done and is still being done by the foregoing credit concerns in the way of taking up and investing State and railway loans. With their comprehensive business facilities, the largest credit concerns of Germany and Austro-Hungary have contrived to play a leading rôle at the Bourse. At the head of the list in Germany stands the Berlin Discount Company (Limited) (Discontocommandite). This was founded by the former Prussian Minister Hausemann; not, indeed, as a joint-stock company, but as a limited partnership, the latter form being locally preferred. The legal status of the present joint-stock and limited liability companies in the German Empire was readjusted by a law passed on July 18, 1884. The advantage of the limited partnerships consists in the fact that the shareholding capitalists are not so much at the mercy of arbitrary directors. In the Discount Company, the shareholders group themselves as passive participants about one responsible director, who, by virtue of his large personal investments, his practical experience, acute insight, gift of organization, and respected character no less than his wealth, inspires unsolicited, effectual confidence. The credit institutions of this kind, in addition to their mercantile purpose, had the general and particular economic advantage of opposing potent competition against the power of the great banking houses, and thus breaking the monopoly which the latter—most notably the world-renowned Rothschilds—had gradually conquered and exercised in the money markets of Europe, especially in the matter of State loans, from the times of the Napoleonic wars. This competition of the credit companies suffered an abatement upon the funding of the heavy State loans Edition: current; Page: [12] and in consequence of similar financial operations; which were of large general advantage, and compelled the great European houses to serve public interests on cheaper terms. Thus a gradual neutralization of the competitive forces came about; and their effect to-day is chiefly seen in the creation of great trusts and syndicates, which have helped to accomplish the large conversions of debt and reductions of interest, and to lower the price of capital to a constant minimum level.

THE ACT OF OCTOBER, 1846.

The new Bank Act, as published on October 5, 1846, decreed as follows: “The Bank is designed to promote the money circulation of the whole community; to utilize capital, encourage trade and industry, and obviate an excessive rise in the rates of interest. Toward the achievement of these ends, the Bank is empowered to discount bills and money orders, as well as Home Government paper, and provincial, municipal, or other public notes made payable to the bearer; to buy and sell the same in its own behalf, or in behalf of public firms and institutions; to supply credit and loans upon sufficient security; to issue bills and cheques, or to receive the same and collect on others’ account; to take in cash capital both upon documented pledges and in current accounts, either with or without interest; to buy and sell all metallic bullion and coins; whereas other mercantile business, and expressly transactions in goods, is hereby forbidden. The Bank is further authorized to accept the custody of gold and silver, coined or uncoined, of precious stones or jewelry, State papers and documents of every sort, as well as sealed packages, without requiring identification of the bearer, upon giving receipt for such deposits, with the right of charging a commission fee.”

In the traffic of bills, the Bank discounted only such paper as was payable at sight and within a maximum term of three months; and, usually, three recognized indorsements were expected. The Bank might also buy and sell good foreign bills or currency, especially to facilitate exchanges of the precious metals. The Bank granted interest-bearing loans within a customary limit of three months, and in sums not lower than 500 thalers. Even articles of commerce might serve as movable dead pledges for such loans, provided they were of domestic ownership and represented a value equal to one-half or, in exceptional cases, two-thirds of the loan, according to the nature of the articles or their marketable qualities. In the way of paper pledges, none but native public certificates were valid. For the like loans, the Bank was entitled to take a maximum of six per cent. interest. Where the precious metals were pledged, a lower rate of interest might be charged. The Bank must publish its interest rates at stated and regular times. In addition to the business of encashment, the Bank was expected to encourage circulation. Besides the stock capital and the advance furnished by the State, the Bank had a working resource derived from legally conveyed deposits protected by the State; namely, those of guardianship and court trusts, church schools, charitable foundations, and other public institutions. Deposits of this kind bore interest at the rate of two to two and one-half per cent. Such dispositions, however, involved an injustice to widows and orphans, in that Edition: current; Page: [15] the Bank dividends amounted to twice or thrice the said rates, and, finally, even to twenty per cent. The Government reserved the prerogative of doubling the capital stock, in conjunction with the shareholders. Bank shares might, at one time, be accepted as collateral in case of loans on the same. Dividends on the State stock were added to the capital account. The reserve fund, constituted by one-fourth of the clear profits, was not to accumulate above fifty per cent. of the capital stock. Upon the contingency of a disorganization of the Bank, the State fund should serve toward covering the debts. After all obligations are discharged through the resources of the Bank itself, the reserve fund is to be divided between the State and the shareholders.

REGULATION OF THE BANK’S NOTE ISSUES.

The Bank was empowered to issue notes, the form of which and the exchange of damaged notes for new ones were under State supervision. The lowest denomination of the notes equaled twenty-five thalers in Prussian silver currency. At the same time, the existing standard value of silver was actually transformed into a kind of double value, by the regulation that the Public Exchequer must accept all the coins of Frederick at a certain fixed price. The total issue of notes should not exceed 15,000,000 thalers. Against the whole amount of notes in circulation, one-third of the sum must be kept on hand in coin or silver bullion, one-half in discounted bills, and the remaining 16.66 per cent. in collaterals against loans, valued according to the rules of the Bank. The Bank was obliged to accept its notes in payments, at all its counters; and in the main Bank at Berlin, whenever the payee demanded. But in the provincial banks, it was customary to retire the notes exclusively in coin, providing the hard cash resources of the paying bank made such payment convenient. The entire resources of the Bank stood pledged for the payment of the notes. The circulation of the notes met with general acceptance throughout the State; and they were made a legal tender, in lieu of coin, at all the public offices, as in place of State paper. The notes, however, were not a legal tender in private transactions. Supplementary to the bank notes, there circulated other paper money of State sanction, to provide an element of elasticity for the convenience of trade, and as a resource for meeting extraordinary needs. But there was no provision for the retirement of these supplemental notes. They were issued sparingly, at a value nominally the same as that of the regular bank notes. In consequence of their limited issue, the solid security of the Prussian Bank, and the circumstance that they were legal tender to the same effect as coin at all the marts of trade, it happened on occasion of the derangement of money values in the other German States (some of which from time to time deliberately depreciated their currency), that the Prussian notes and exchequer bills not only circulated in every part of Germany, at their full nominal value, but were also freely accepted in the neighboring countries—particularly in Switzerland—and often at par. Such was the universal Edition: current; Page: [16] confidence in this State paper money, that it withstood the most violent shocks; and, even in the panic attending the revolution of March, 1848, public confidence was lost for a few days only. In international trade, the Prussian bank notes represented all Germany, and when the money values of Prussia chanced to be disturbed, these notes were no less respected than those of England and France.

THE BANK’S PROFITS, MANAGEMENT, AND PROGRESS.

Concerning the profits of the Bank, the following regulations were observed: (1) First of all, the shareholders were to receive three and one-half per cent. interest on their stock; (2) a similar yearly interest should accrue to the State; (3) one-fourth of the remainder must go toward the accumulation of the reserve fund, and the residue be divided equally between the shareholders and the State as dividends. In case the clear profits were under three and one-half per cent., the deficit should be supplied by the reserve fund.

The Bank was placed under the general control of the State, which especially reserved to itself the right of decision in questions of the erection of branch houses.

The governor of the Bank was appointed by the Government, and he then appointed the usual officers, who should serve during his incumbency. There was this exception, that the Government also appointed the Superior Board of Directors, comprising five members and a president. Two members had the special charge of signing the Bank’s obligations. The general annual meeting of shareholders occurred in January or February, when they would elect a Central Committee of fifteen members, who co-operated with the directors to determine rates of interest, expiration of bills, acceptation of the collaterals offered in sundry sorts of effects, personal credit, and so forth. Where differences of opinion arose between the Central Committee and the Superior Board of Directors, the Bank governor decided. The aggrandizement of Prussia in consequence of the German War of 1866 occasioned an increase in the capital stock of five million thalers (September 24, 1866), and an extension of the branch establishments to the number of one hundred and thirty. The institution was constantly acquiring a larger development. The State, whose contributed fund had now grown to be more than two million thalers, received not only the three and one-half per cent. interest, amounting to 66,423 thalers, but also a dividend of 968,166 thalers. The shares now yielded eleven per cent. The branch houses gained in importance year by year. By their instrumentality every Prussian town of any business activity enjoyed banking facilities; and now that the Prussian Bank has been incorporated into the Imperial Bank, the same is true of every considerable business town in the German Empire. Bills may be negotiated even upon the smaller towns at the prevailing discount rates; or if overdue they may be redeemed on payment of a moderate fee. As Edition: current; Page: [17] much as a decade before the amalgamation of the Prussian with the Imperial Bank, the former had bought such remittances to the amount of over three million thalers, or nine million marks, in Prussian localities, and reaped a profit of four to five per cent.—equivalent, for those times, to the discount rates of modern bourses. But for the interposition of the Bank, trades-people must have paid much dearer for their needs of credit. Not even in England are there such favorable facilities for disposing of bills on the smaller towns. Upon the increase of the capital stock in 1866, the amount of the coin reserve against notes was raised to one-third of the outstanding circulation. The Bank was further restricted in the issue of notes, by requiring that two-thirds of the note circulation must be constantly covered by unimpeachable bills of exchange. With the growth of the Bank, through its branches in other German emporiums and principal towns, and especially through its relations with Hamburg, Frankfort, and Leipzig, there arose a new problem, how to provide for the actual clearing-house business, which had been previously neglected both in Germany and Austro-Hungary. This new phase of activity on the part of the greatly enlarged Bank grew so rapidly that, in ten years after the clearing-houses were inaugurated, the total transactions had reached the high figure of 18,500,000,000 marks.

The following tables furnish data which will substantiate our preceding survey. The balance-sheets go to prove that the law of 1850 marked the beginning of a new era in the banking system.

From 1847 to 1855 the business development of the Bank of Prussia ran the following course:

However, we are anticipating our delineation; and before we pass on to the period of the great monetary and banking systems of our own times, we must consider the other German banks.

IMPERIAL BANK NOTES.

The Imperial bank notes were to be issued to the amount of 120,000,000 marks, with the design of giving representative circulation to the war treasure of the same magnitude, which was received from Prussia and preserved in the Julian Tower at Spandau, for secret preparations of war, in times of peril. There was a further, provisional augmentation of these notes by a sum of about forty million marks, in order to ease the German governments in the matter of withdrawing their old paper currency. To-day, this whole item is duly and constitutionally settled. The next step was to retire and melt over the small silver denominations and also the silver thalers. This operation continued in orderly process until the Imperial Chancellor, Prince Bismarck, influenced by silver partisans, obtained ratification for the silver purchases of 1878. Later, there was a considerable export of coined silver to fill a contract with the Egyptian Government, though a large amount is still on hand in the cellars of the Imperial Bank. All this experience had a powerful effect in the discussion of bank reforms which occupied the Imperial Diet in the second half of 1874; and the subsequent Bank Act shows an unmistakable tendency to restrict the circulation of notes. Expert financiers had long been shy of a redundant issue of paper currency, and esteemed it their first duty to surround the privilege of emitting bank notes Edition: current; Page: [30] with the utmost possible safeguards. The abuses of paper money had been too glaring; not only in the eighteenth century, but also in the first half of the present century, both in England, the United States, various parts of Germany, and in France and Austria. Still more recent instances occur in the case of Russia and certain transatlantic republics. Hence it was that an extreme reactionary movement set in, which involved even the Bank of England in serious trouble, through the restrictive Bank Act of 1844. At the very time when the Bank should have been a propelling instrument, its machinery stood stock-still, and had to suspend payments no less than three times. The limitation clauses, with respect to the issue of notes, had worked in a manner quite contrary to the anticipations of the framer of the law. So, too, if the German Government and the Imperial Diet in 1874 could have foreseen the present situation in England, where for some years past the Bank has had more gold in its vaults than notes in circulation—which surplus has risen from ten to twenty millions sterling within a single year—or could they likewise have anticipated the present condition of the German Imperial Bank, which frequently has a greater supply of hard money than of notes—they would not have bound the issue of Imperial bank notes nor of the old provincial notes that were still of legal validity by such narrow limitations. Neither would they have put an Imperial tax on notes which may be issued beyond the prescribed contingent—a device also followed by the reorganized Bank of Austro-Hungary. These were steps in a retrograde direction, and not in the spirit of the old Prussian Bank, whose constitution imposed no other restriction than that which was prudently exercised by merchants of stability; nor did any bank ever maintain a more solid conservatism in practice. By good fortune, however, and in spite of the great commercial crises of 1873 and 1890, the international money market took such a trend as not to occasion disaster by reason of the possibly excessive narrowing of the contingent notes. The whole course of affairs was eminently favorable toward a centralizing of the entire system of the banks of issue.

The various boards of directors had not failed to advocate their respective doctrines while the Bank Act was under discussion. Some were still in favor of many banks of issue; and this opinion implied a disposition to support the old system. Owing to the many German sovereign princes who enjoyed the rights of State concessions, there were perhaps more banks of issue than there would have been in case of unrestricted freedom to all. Be this as it may, the German Bank Act of 1872 confirmed thirty-two banks of issue in their full rights, which enabled them to operate side by side with the Imperial Bank, as reconstituted on the actual foundations of the Prussian Bank. We shall recur later to the matter of their contingent issue. Suffice it to say here that the wonderfully rapid and flourishing growth of the Imperial Bank quite eclipsed the advocates of multiplied banks of issue, and would even appear to justify the radical adherents of the opposite contention that there be but one State bank. Of the total number of thirty-three German Edition: current; Page: [31] banks of issue—including the Imperial Bank—which were opened for business, according to the new Imperial monetary standards, in 1875, only seven, besides the Imperial Bank, are in operation to-day; and even these might be easily and advantageously replaced by branch institutions attached directly to the Imperial Bank.

WORKING REGULATIONS OF THE IMPERIAL BANK.

In more or less direct connection with the Imperial Bank, there are at present two hundred and sixty-three branch banks in the German Empire, which are embraced under four classes:

DISCOUNT BUSINESS.

COLLECTIONS.

Money orders, cheques on domestic banking houses not connected with a clearing-house, and any paper payable in marks and at a banking locality, are collected by the Imperial Bank for a commission of one-tenth of one per cent., and a minimum commission of fifty pfennigs per single collection, with postage charged to the payee. The commission is slightly augmented in case of collections outside the district in which the bank is located; and the minimum charge per single collection is fifty pfennigs. Coupons of every sort are collected at a charge of one-fourth of one per cent., or a minimum of fifty pfennigs per single transaction. In case of paper which returns uncollected by default of payment, the Bank makes charges for protest and postage, besides an invariable charge of fifty pfennigs per single paper, without regard to the amount at stake. These collections must not exceed a term of two weeks. The indorsed papers are forwarded to the bank nearest the place of payment, and if they have a shorter term than five days to run, they bear the qualification, “Not responsible for presentation at the stated time, in the event of protest.”

LOANS.

The Imperial Bank and its branches grant short-dated loans at a published rate of interest, upon security in the form of the precious metals, native merchandise, and certain specified commercial paper. The main Bank requires the actual deposit of the latter, under the category of papers of value. Loans are not usually furnished in amounts for less than five hundred marks. A loan may be repaid from day to day, and also be recalled at any time, without notice or term of grace. If the debtor falls into arrear, or the interest be delayed, the Imperial Bank is authorized to sell his pledge. Interest is payable quarterly. Partial payments are allowed by installments of at least ten per cent. of the sum due, though never in amounts under five hundred marks. Should the security fail to satisfy the Bank, it reserves the right of personal claims against the pledgor. Where pledged commercial paper is subject to notice of warning, disposal by lot, collection, or other vicissitudes, the pledgor must effect or institute the necessary measures for securing the Bank, and shifting the prejudicial contingencies upon himself alone. When rates decline, he must supply the resulting deficiency. Pledged securities must be covered by fire insurance. Edition: current; Page: [40] The Imperial Bank is not responsible for damages unless they be caused by gross carelessness on the part of the Bank.

AVAILABLE PAPER SECURITIES.

The Imperial Bank accepts two classes of commercial paper as security; the first is taken for three-fourths of its quoted value; the second for only fifty per cent. of the same. The former class includes loans and money orders issued by the Empire or the several German States; letters of mortgage from the mortgage credit companies or the joint-stock mortgage banks; obligations of the principal credit and savings banks, and priority railway bonds. The second class includes bonds of the United States, Italian rentes, Austro-Hungarian four per cent. gold rentes, bonds of the Swiss Republic, Norwegian and Swedish Government bonds, and three per cent. guaranteed priority bonds of Italian railway companies.

CHEQUES.

In order to open a bank account and facilitate the negotiation of cheques, applicants must address themselves to the bank in proximity to which they live. Should their overtures be favored, they receive certain formulated instructions, together with an account-book, in which all debit and credit transactions, whether cash or on account, are duly entered. Further dispositions in this matter are not provided by the Imperial Bank. Cash deposits, cheques, and bills of exchange payable at the Imperial Bank, likewise bills purchased and loans furnished, are at once entered in the Bank account. Cheques, bills, money orders, accounts, and other paper must be receipted and regulated in a prescribed form, for which the Bank supplies full directions. Collections are also promptly entered in the Bank account. Full receipt is withheld until payments are quite complete. Unpaid paper is charged to the account-holder, for him to settle no later than the forenoon of the day following the date when the obligation matured. The Bank has nothing to do with protesting unpaid bills. Commercial paper must be delivered to the Bank under a special mark and seal. Cash is paid out for white cheques drawn on a specified person or firm, and having the alternative designation “or bearer.” Bank accounts are managed free of charges by the Bank, but the moneys thus handled yield no interest. Account-books must be returned as often as possible, and at least once a month, for the itemized entries. The Bank prohibits the use of these accounts by third persons.

NEGOTIATION OF COMMERCIAL PAPER.

The main Bank and its branches buy and sell commercial paper for a commission of one-eighth of one per cent.

CUSTODY OF VALUABLE SECURITIES.

The main Bank in Berlin accepts the custody of valuable securities and documents of every description. The transfer may take place either through an authorized agent or by post. The Bank officials are bound to observe the utmost possible secrecy with reference to such trusts. Moreover, as many as three persons in any single instance may deposit ordinary papers on making the following declaration: “We are all and severally qualified to dispose of the papers and moneys herewith conveyed, or to take receipts therefor in full.” The Imperial Bank accepts the safe and inviolate custody of such trusts both under the letter of the law and with these added obligations: (1) To draw in the appertaining coupons on days when they are due, and sell the same at the Bourse; and (2) to keep a constant watch of the lists of allotment, etc. For this manifold responsibility and the attendant risks, there is an annual fee of one-twentieth of one per cent., or three-fortieths of one per cent. in case of foreign securities.

SEALED DEPOSITS.

The Imperial Bank also undertakes the custody of sealed deposits in so far as the storage facilities of the Bank admit; and no questions are asked concerning the contents of such parcels. These deposits must be accompanied with the Christian name and surname of the depositor, or the name of a firm, as the case may be; and they must be so sealed that none of the contents can escape without fracture of the seal. The maximum value thus insured is five thousand marks; though special contracts are also accepted for higher values, on consideration of a proportionately higher fee. The Bank is not responsible for losses inflicted by “act of God,” nor for internal decay of the parcels themselves. The latter provision is particularly important; as, for instance, where a great fire breaks out, and certain papers become so damaged by water as to be no longer decipherable, in such cases the depositor must bear the loss. In fact, there is no absolutely safe place in the German Empire for the custody of valuable papers, though such safety is offered in case of the Julian Tower at Spandau, where the war treasure of 120,000,000 marks in gold is preserved; and also by the “stronghold” of the Vienna Giro und Cassenverein. The storage fee for parcels thirty centimetres or less in width and height by forty centimetres in length and ten kilogrammes in weight, is ten marks per annum; and for double these dimensions twenty marks. Packages of still greater bulk are not received. The insurance fee for every thousand marks, or additional part of a thousand, is twenty-five pfennigs per annum.

AMOUNT OF THE BANK’S TRANSACTIONS.

To illustrate the important reforms in the German banks of issue, we subjoin the balance-sheets of the Prussian Bank upon its transition into the Imperial Bank for December 31, 1875, and those of the Imperial Bank for 1876 and 1894, together with a comparative review of the business results achieved by the Imperial Bank from its first creation to the end of 1894. Lastly, we shall give some recent monthly reports in evidence of the significant increase in gold coin and bullion:

In 1894, the total transactions of the Imperial Bank and its two hundred and sixty-three branches amounted to 110,783,951,000 marks (33,647,542,000 for the main Bank, 77,136,409,000 for the branches), against a total of 110,942,348,400 marks for 1893, showing a decrease of 158,397,400 marks for 1894.

The rates of discount for bills varied between five and three per cent.; and rates of interest on loans were one per cent. higher. The circulation of bank notes reached its lowest figure on February 23d (892,870,000 marks), its highest on December 31st (1,211,232,000 marks). The average was 1,000,384,000 marks. This makes an average circulation of 15,557,000 marks in excess of that for 1893; which was 984,827,000 marks. The limit of uncovered circulation provided by Section 9 of the Bank Act was not overstepped in 1894. Bank accounts with patrons amounted, for 1894, to 13,796,000,000 marks. The number of patrons was 10,794; and of these, 9725 were in account with the branch banks. Imperial and State Treasury accounts reached a total of 4,260,000,000, in round numbers. This would raise the total Bank account business to some 88,643,000,000 marks for 1894, as against 86,784,000,000 marks for 1893; both reports including receipts and outlays for the Empire and the Federal States.

Deposits not on interest were received to the sum of about 14,000,000 marks; and the same were paid out to the extent of 13,500,000 marks. Money orders were delivered by the main Bank and its branches to the amount of about 96,000,000 marks, free of commission; and the number of separate orders was 4146. Orders with commission fees numbered 7923, to the amount of about 34,000,000 marks. Total money orders, 130,104,777 marks. The incidental fees amounted to 7525 marks.

The cash account, in German currency and gold in bullion or foreign coin, at 1392 marks per pound fine, stood lowest on January 7th—808,807,000 marks—and highest on November 23d—1,075,587,000 marks. Average, 934,327,000 marks, as against 841,723,000 marks for the preceding year, or an increase of 92,604,000 marks. The total cash balance for December 31, 1894, was distributed as follows:

COIN RESERVE.

On an average during the year, ninety-three and four-tenths per cent. of the note circulation for 1894 was covered by coin, as against eighty-five and forty-seven hundredths per cent. for 1893. Bank notes and all other daily Edition: current; Page: [51] obligations for 1894 were covered in the proportion of sixty-two and fifty-nine hundredths per cent., as against fifty-eight and fifty-six hundredths per cent. for 1893. The amount of gold on hand, both bullion and foreign coin, was M.338,233,035.42 pf. on January 1, 1894; and gold was bought to the amount of M.241,130,576.51 pf. Total gold, M.579,363,611.93 pf. Of this total, M.156,926,579.37 pf. were either coined or sold again, leaving a gold reserve of M.422,437,032.56 pf. There was also an attendant profit amounting to M.17,760,93 pf., the actual value of the gold reserve being M.422,454,793.49 pf. These revelations are of much interest, as they furnish our first authentic information in regard to the status of the Imperial Exchequer in silver thalers, which are stored in the Bank cellars to the amount of only some 214,000,000 marks—not at all so much as was generally believed, and less than one-fourth of the total coin reserve. The truth is, the question of a redundancy of old silver thalers would never have been agitated but for the proposal of the Imperial Diet to coin new silver thalers with a value of five marks. From January 1, 1896, forward, the Imperial Bank could quite safely include the item of silver thalers in the weekly reports; that is, without the slightest danger of injuring the Bank’s credit.

THE REICHSBANK CLEARING-HOUSE.

One of the most indispensable departments of the Imperial Bank is the clearing-house business, first organized twelve years ago, in the great commercial centres of the German Empire. The results have been so prompt, and even magnificent, that we may fairly reckon the clearing-house as a new national institution, for the want of which Germany had long been behind Great Britain and the United States.

The first German clearing-house was opened in Berlin on April 2, 1883, and there followed nine others, in the subjoined chronological order: Frankfort, April 23, 1883; Stuttgart, May 15, 1883; Cologne, May 22, 1883; Leipzig, June 25, 1883; Dresden, July 10, 1883; Hamburg, July 24, 1883; Breslau, March 1, 1884; Bremen, April 7, 1884; Elberfeld, March, 1893. These establishments incalculably augment the practical value and utility of the Imperial Bank, and their development has been so comprehensive that they turned over the round sum of nineteen billion marks in the single year of 1895. We owe the following data to the courtesy of Dr. Koch, president of the Board of Imperial Bank Directors:

PERIODICAL STATEMENTS OF THE REICHSBANK.—COIN RESERVE.

Until a few decades ago, political economists were accustomed to urge strenuous measures toward the statutory limitation of bank notes; and banks of issue were narrowly watched for fear they might overleap their available resources. The English Bank Act of 1844 was framed on those suspicions, and Germany and Austria were influenced by like apprehensions. Since the middle of this century, however, events have occurred which are likely to relegate such anxious oversight into the limbo of borrowed troubles. A new era has arrived in the history of the precious metals; comparable only to the discovery of America. In 1850, there began an annually increasing production of gold, which had risen in 1894 to the vast amount of 850,000,000 marks; and from 1870 forward, the yield of silver also assumed huge proportions, amounting in these times to an annual sum of 165,000,000 ounces fine. Indeed it is not impossible that this immense yield of silver may have prevented a decline in the price of gold. The latter is maintained firm, not only by this particular circumstance, but also by the statutes of the Bank of England and of the German Imperial Bank. These institutions, in other words, are authorized to buy gold bullion at a fixed price with their bank notes; and we consequently face the remarkable and novel spectacle in commercial history of a gold reserve sometimes in actual excess of the note circulation. The Bank of England, for several years past, has had more gold in its vaults than notes in circulation; so that occasionally the gold surplus over the notes has been more than fifteen million pounds sterling. The German Imperial Bank follows this example, though on a more modest scale. In Germany the coin reserve at least somewhat exceeds the note circulation from time to time. The Bank of France is far from displaying the like pride of gold, and still clings to the depreciating “double standard”; though its gold reserve, which twenty years ago was very much below the silver reserve, has now risen much above it. The Austro-Hungarian Edition: current; Page: [53] Bank is still paying in compulsory legal-tender paper, and is not required to redeem its notes in coin; but with a view toward ultimate specie payments, it has materially increased its gold supply. Its stock of gold was eighty million florins at the middle of August, 1892, and two hundred and orty-seven million florins on the 23d of December, 1895. It is interesting to trace the development of this unusual reinforcement of gold reserves by consulting the reports of the great banks; and we therefore submit an extract from the official statements of the Imperial Bank, which will be found to furnish abundant material for reflection.