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The German System

The Imperial Bank, with head offices in Berlin, and about one hundred
branches and more than four hundred sub-branches scattered throughout
the country, plays essentially the same role in the German banking
system that the Bank of England and the Bank of France play in the
English and French systems, respectively. It was established in 1875
by an act which also profoundly affected the entire banking system of
the country, and its development has been aided and directed by
several acts passed subsequently.

Its capital, supplied by the general public, amounts at the present
time to 180,000,000 marks ($45,000,000), and it is governed by three
boards, known respectively as the Curatorium, the Direktorium, and the
Central Ausschuss.

The Curatorium is composed of five members, of which body the
Chancellor of the Empire is ex-officio chairman. A second member is
appointed by the Emperor, and for that position he has always selected
the Prussian Minister of Finance, and the three remaining members are
appointed by the Bundesrath. It meets quarterly and reviews all the
operations of the bank. It, or rather, the Chancellor, its chairman,
has supreme power, which, however, he has never exercised except on
one occasion, when he ordered the bank not to accept Russian
securities as collateral for loans, an order since revoked.

The administration of the bank's affairs is chiefly in the hands of
the Direktorium, consisting of a president, vice president, and seven
other persons, all of whom are appointed by the Emperor for life, from
a list of candidates recommended to him by the Bundesrath. This board
selects the staff of bank officers and clerks, and superintends the
daily conduct of the bank's business.

The Central Ausschuss is a committee of fifteen persons elected by and
representing the stockholders. It holds monthly meetings; has the
right to demand complete information concerning the bank's operations,
to discuss all matters freely, and to tender advice and counsel; but
it has no power to control except regarding two matters: it can set a
limit to the amount of securities the bank can purchase, and can veto
any proposed transactions with the Imperial Government or with the
governments of any of the states.

Like the other central banks described above, it receives on deposit
and disburses the funds of the Imperial Government; administers the
coin reserves of the country; conducts the domestic exchanges, and
serves as a bankers' bank. It is free to do business with the general
public, but the legal and other limitations under which it must
operate give the other banking institutions of the country the
advantage in competition for this kind of business.

It shares the right of note issue with four other banks, which, out of
thirty-two that retained that privilege at the time the Imperial
banking system was established, alone retain it at the present time.
The issues of these four institutions, however, are relatively small
in volume, and the Imperial Government has the right to deprive them
of it January 1, 1921, or any tenth year thereafter, on condition of
giving one year's notice of its intention so to do. The issues of the
Imperial Bank are subject to the following regulations: they must be
covered by cash and discounted bills maturing in not more than three
months, and signed by at least two solvent persons, the proportion of
cash being not less than one-third of the total. If the total amount
issued exceeds the Bank's holdings of gold bullion, specie, and
government notes by more than 750,000,000 marks at the end of March,
June, September, and December, and 555,000,000 marks at other times, a
tax of five per cent per annum is levied on the excess.

The law confers upon the Bank the following powers:

a. To buy and sell gold and silver coin and bullion.

b. To discount, buy and sell bills of exchange whose
maturity shall be three months at the longest, and for which
usually three, and in no case less than two, accredited
vouchers shall stand good; furthermore, to discount, buy and
sell bonds of the Empire or of any German state, or domestic
municipal corporations, provided such bonds mature within
three months at the longest and conform to the new standards
of value.

c. To grant interest-bearing loans for terms no longer than
three months, upon movable security (lombard, or deposit
loan business), such as: gold and silver, coined or
uncoined; interest-bearing or non-transferable bonds
maturing within a maximum term of three months, whether of
the Empire, a German state, or of domestic municipal
corporations; interest-bearing non-transferable bonds on
which the interest is guaranteed by the Empire or by any one
of the German states; capital stock and stock priority
shares, fully paid up, of German railway companies in
actual operation; mortgage bonds of the provincial,
municipal, or other land credit institutions of Germany that
are subject to state control, including shares of German
mortgage banks to an amount never exceeding three-fourths of
their market value; interest-bearing non-transferable bonds
of foreign states, and foreign railway priority bonds,
covered by state security, in amounts not exceeding 50 per
cent of their market value; bills of exchange of recognized
soundness, after deducting at least 5 per cent of their
market value; and pledges of native merchandise, in amounts
within two-thirds of their value.

d. To negotiate collections for the account of individuals,
institutions, and governing boards; and upon security, as
before mentioned, to furnish payments, and make orders or
conveyances on the branch banks or on correspondents.

e. Upon prior security, to buy on behalf of outside parties,
effects of all kinds, including the precious metals; and
after delivery to sell the same.

f. To receive money for circulation or on deposit, with or
without interest, the sum of interest-bearing deposits not
to exceed that of the capital stock and reserve fund.

g. To accept the custody or other management of objects of

Besides the Imperial Bank there are in Germany eight very large and
powerful banking institutions and a considerable number of smaller and
less powerful ones. The eight great ones have each its head office in
Berlin, and connections, through branches, agencies, and controlled
institutions, in other parts of the Empire, the German colonies, and
foreign countries. Together they control about eighty per cent of the
entire banking capital of the Empire. In reality they are federations
of banking institutions, many of which were once independent, and some
of which were promoted and established in the interests of the group.

While these eight institutions are primarily engaged in commercial
banking, they are also promoters on a large scale of German industry
and commerce, both at home and abroad. Through interlocking
directorates, stock ownership, and in other ways, they are closely
allied with the leading industrial and transportation interests of the
Empire, and they have been and are leaders in the promotion of these
interests in other parts of the world, notably in the Orient, South
America, and Africa. They are, therefore, leaders on the stock as well
as the discount markets of the country, and are widely influential in
investment as well as commercial banking affairs.

These, as well as the other commercial banks, consisting for the most
part of local institutions and those catering to special interests,
use the Imperial Bank for rediscounts, for transfers of funds between
different parts of the country, and as a depository for surplus funds.
They do not normally keep on hand more cash than is needed for till
purposes. Being in easy reach of an office of the Imperial Bank,
supplies can be obtained at any time by checks drawn against credit
balances or through rediscounts of commercial bills. Special accounts
are carried for transfer purposes and are used even in the transfer of
funds between different offices of the same institution.

On account of its right to issue notes against commercial securities,
the Imperial Bank has the power to meet the demands made upon it and
to supply the country with an elastic medium of exchange. The levy of
a tax upon the excess of the issues above a prescribed maximum
prevents perfect elasticity, unless this maximum be kept above the
highest point which the circulation would normally reach, since the
actual levy of the tax forces the rate of discount to such a point as
to seriously restrict commercial operations. However, since the line
between commercial and investment banking is not drawn by the great
Berlin banks with the care that is desirable, and since they have been
able at times, especially on account of their foreign connections, to
embarrass the Imperial Bank in its efforts to maintain adequate specie
reserves, such a tax is probably a desirable safeguard against
over-expansion of credit.

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