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

value.



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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