home | authors | books | about

Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XX

Commerce and Finance - Chapter XX

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII







GERMAN BANKING.

REICHSBANK; ELASTICITY OF GERMAN CURRENCY; STABILITY;
RUSSIAN BANKING.

Prior to the unification of the German Empire in 1871 each
state had its own banking system, and most of the banks were
allowed to issue notes according to certain restrictions and upon
such bases as the states and cities establishing them should
prescribe. These banks differed materially as to the limit of
their authorized issues, and were bound to a great variety of
restrictions as to their requirements of a reserve. Under this
German Bank- s ^ a ^ e ^ affairs notes were current only in the
ing before the state where they were issued, and trade was
seriously hampered for want of a stable and uni-
form currency. The coinage law of 1871 undertook to establish a
uniform monetary system throughout the empire, and paved the
way for the adoption of the gold standard in 1873. In 1874 a
law was passed abolishing the different issues of paper money
then current throughout the different states of the empire and
substituting therefor imperial bank notes convertible into gold.
The new currency was distributed to the states to the extent
of 180,000,000 marks. Finally, in 1875, all banks of issue
throughout the empire were brought under a uniform law, and
made a part of the system of imperial finance, thereby greatly
improving and facilitating trade and commerce.

Under this system the Bank of Prussia became the Imperial
Bank of the empire, with a near approach to a monopoly of the
note issuing power and the same system for the gradual abolition
of the issues of other banks and the final concentration of the
power of issuing circulating notes in the Imperial Bank as is

196



THE REICHSBANK. 197

possessed by the Bank of England. The capital of the Imperial
Bank (Reichsbank) is 120,000,000 marks, divided into shares of
3,000 marks each, and is all owned by private in-
Reichsbank dividuals. Unlike the Bank of England, the
Reichsbank is subject to governmental control. Its
affairs are managed by a president and board of directors named
by the government, subject to the chancellor of the empire, or a
substitute named by him who has entire charge of the bank, and
directs its policy. The stockholders of the bank have no voice
whatever in its management. They merely furnish the capital
and divide the profits of the institution. As a matter of fact,
however, the stockholders do not receive all of the profits. In
case the net profits exceed 3J per cent., then the government
becomes a sharer in the profits above that limit.

The German system of note issues rests upon a mixed basis
of securities and specie, somewhat similar to that of England,
with the important difference that the law contents itself with
requiring the maintenance of this basis, without specially pledg-
ing or setting apart specific coin or securities for the purpose,
as is done by the Issue Department of the Bank of England.
German currency is secured by the salutary power of the law
rather than by specific property, and to make sure
^ the observance of the law, all banks of issue
are required to report the condition of their note
issues every week to the chancellor of the empire. No precise
limit is fixed for the aggregate circulation of the notes of the
Reichsbank and other banks of issue, but the total of notes which
can be issued without being covered by cash in the vaults of the
banks is 385,000,000 marks, of which 250,000,000 marks are
allowed to the Reichsbank and 135,000,000 marks are appor-
tioned among the other banks. For all notes issued by any
bank beyond its limit, the government requires that cash shall
be held to the full amount of such issue, the term "cash" here
meaning German and foreign gold, bullion, imperial treasury



198 HISTORY OF BANKING.

notes and the notes of other banks. But if any bank issues
notes beyond the limit and not covered by cash a government
tax of 5 per cent, is imposed, thus taking away the profit, and
hence the inducement to such extra issue. In case the weekly
report of any bank shows that its issue exceeds the limit as above
explained, a tax of 5/48 per cent, is charged, this being the rate
for one week at 5 per cent, per annum. The law requires in
any case, however, that the cash held, exclusive of the notes of
other banks, must equal not less than one-third of the total
note circulation, and that the remainder shall be protected by
good assets, usually consisting of securities or discounted paper
having not more than three months to run and bearing two
solvent names. The note issues of Germany thus rest upon a
mixed basis of specie and other assets.

As previously stated, the legal limit of note issue without
specie reserve may be exceeded upon payment of the government
tax of 5 per cent.. This is an important feature of the German
system, since it gives an elasticity to the currency of the empire.
In a time of stringency, the rate of discount goes
the currency above 5 per cent., and then the banks can make an
issue beyond the limit, loan the funds at the ruling
rate of discount and have a profit left after paying the govern-
ment tax of 5 per cent. But the moment the money market
loosens and the rate of discount falls below 5 per cent, the
banks can no longer afford to loan out funds at a rate which
is lower than the tax which they must pay to the government,
and hence the extra circulation is retired. By this system the
volume of the circulating medium adjusts itself to the needs of
the country. This automatic contraction and expansion has been
of great benefit to the commercial interests of Germany. In this
way financial stringencies have several times been relieved and
probable panics averted.

The currency of Germany is kept on a gold basis by the
Imperial Bank, which is required to redeem its notes on demand.



BANKING RESERVES. 199

While the notes are not issued against a specific reserve, as in
the case of the Bank of England, but against the general assets of
the bank, and are not even a prior lien on those assets, never-
theless a sufficient supply of gold is carried in the vaults of all
the issuing banks to place the redemption of the notes beyond
doubt in the minds of the people. In 1899 the
Gold Basis total volume of circulating notes outstanding in

Germany amounted to 1,322,208,000 marks, and
the total metallic reserve held by the eight banks issuing these
notes was 911,528,000 or a little less than seventy per cent.

Bank notes in Germany are not issued in lower denomina-
tions than 100 marks, and this restriction keeps in constant
circulation a considerable quantity of specie for small trans-
actions. The bank notes are not a legal tender, but their credit
is maintained by their convertibility at all banks of issue. By
means of an extensive system of branches of the Reichsbank scat-
tered throughout the empire, the system of deposit banking is
becoming quite popular, thus reducing to a certain extent the
use of bank notes in the transaction of business. A large number
of joint stock banks located in Berlin and other prominent
cities of the empire have been organized, and materially assisted
in furnishing banking facilities to the people and educating the
masses in the utility of deposit banking. These joint stock
banks, as a rule, carry their reserves in the Reichsbank, that
institution being the safest and most convenient
storehouse of gold in the empire. Thus it will be
seen that these banks sustain very much the same
relation to the Reichsbank that the joint stock banks of London
do to the Bank of England. The policy of the management of
the Reichsbank has been to guard well these reserves by a large
supply of gold in the vaults, so as to protect the credit system of
the empire by establishing perfect confidence. Like the Bank
of England, the Reichsbank resorts to the scheme of raising
or lowering its rate of discount to protect its reserve, raising



200 HISTORY OF BANKING.

its rate in times of danger and lowering it in times of peace
and plenty.

In order that the action of the Reichsbank may virtually
control the money market, the law forbids all other banks of
issue to discount at a rate lower than that of the Reichsbank
when its rate is as high as four per cent. Thus when the
Reichsbank raises its rate to or above four per cent, all of the

banks of issue are compelled by law to do the
Banks 18 ther same - When the Reichsbank lowers its rate below

four per cent, the other banks are allowed to
discount at a rate of one-fourth of one per cent, lower than the
Reichsbank rate. Were it not compulsory on other banks to
follow the rate announced by the Reichsbank, business would
merely shift from one bank to another and the general situation
would in no way be affected or improved. The Reichsbank has
about three hundred branches scattered throughout the empire
and with the influence of these in addition to the banks of
issue the rate of discount as established in Berlin by the
Reichsbank is easily maintained and made to control the price
of money throughout the empire.

In addition to the specie and bank notes in circulation in
Germany the government has notes of its own in circulation. An
imperial "war chest" is kept in which is stored a large reserve
imperial ^ ^ as an emergency fund to be used in time

Treasury of war. This fund is estimated at 150,000,000

marks, and in order to prevent so large an amount
of cash from lying idle, an issue of imperial treasury notes for
an equal amount is put into circulation. These notes are really
gold certificates, since they merely circulate instead of the coin.

RUSSIAN BANKING.

The Imperial Bank of Russia was established in 1860 with
a capital of 25,000,000 roubles. It is wholly a government in-
stitution, controlled by the Czar, and has no connection what-



CIRCULATION AND REDEMPTION. 201

ever with private individuals, except to the extent of its daily
business transactions. It thus partakes of the imperialistic
character of the government in a decided degree. As has been

expressed by one economic writer, it "is as if we
of 1 Ru r ssL Bank had a bureau in the Treasury Department with

power to do a great and varied banking business
and with branches all over the country." Unlike the Bank of
England, the Bank of France, or the Reichsbank of Germany,
which are formed by means of private capital, the Imperial
Bank of Russia is merely the Russian Government engaged in the
banking business with its own capital and for its exclusive
profit. In 1896 the capital of the bank was increased to 50,-
000,000 roubles. It issues the paper money of the empire ex-
clusively. The issue and the commercial banking departments
are kept entirely separate, upon practically the same plan as
that followed by the Bank of England.

Paper money is the actual medium of exchange in Russia.
Notes are issued in denominations of 100, 25, 5, 3 and 1 roubles
and are full legal tender. Specie payments have been suspended
since 1855. The paper rouble is worth 66 copecks, there being
100 copecks in a rouble. The authorized circulation of paper

currency based upon the credit of the govern-
circuiation ment is 769,342,911 roubles. This is fiat money.

Above this the note issues, if any, must be covered
by the deposit of an equal amount of coin. The total circulation,
both covered and uncovered, is about 1,100,000,000 roubles,
and the metallic cash in the bank vaults is in the neighborhood
of 700,000,000 roubles, of which less than twenty millions are
in silver.

Although the bank holds what is called a redemption fund,
there is no provision made for the redemption of the notes. The
stock of gold which is held is merely for the purpose of estab-
lishing confidence in the minds of the people, preventing fluctua-
tions or depreciation of the paper currency and holding the



202 HISTORY OF BANKING.

value of the paper at a fixed rate in proportion to gold. Under
this policy the rouble has been practically stationary in value

during the past ten years, and its value has been
Redemption fixed by exchange at 66f copecks, or, one gold

rouble as equivalent to one and one-half paper
roubles. The paper currency is thus given a fixed value and
the two roubles paper and gold, circulate side by side at the
agreed value of three to two. The government has accumulated
its gold reserve by retaining most of the gold product of the
Kussian mines in recent years.

The commercial banking department of the Imperial Bank
of Eussia exercises all of the ordinary functions of a bank of
deposit. By means of its one hundred branches scattered
throughout the empire, the Imperial Bank has been able to
reach the people and supply needed banking facilities in a fairly
satisfactory measure. The policy of the present Czar is to de-
commerciai velop the almost limitless resources of the country,
Banking and to this end the government, through its bank,

is very liberal in making loans, frequently taking
risks which would not be regarded as safe according to the usual
rules of credit. The government no doubt is willing to take
some risks for the sake of the general betterment of the country,
and it can afford to make unusual loans since it has extraordinary
power to punish delinquent debtors.

Loans for development purposes are regarded with especial
favor by the loan department of the bank, since new industries
in all parts of Eussia are much desired by the Czar. Agricultural

loans are a prominent feature of Eussian banking.
Loans These consist of loans made to small farmers upon

a pledge of their products, or the guarantee of
individuals who may be regarded by the bank as trustworthy.
Loans are also made to mechanics and manufacturers upon
pledges of their products. In both this and the agricultural
class of loans the property pledged remains in the possession of



LOANS. 203

the producers, and the loans are made for long terms until the
products can be marketed. This system results in some losses
to the government, but the general benefit to the country by
stimulating industry is believed by Eussian statesmen to more
than compensate for the percentage of losses.

It will be seen from the foregoing description that the Russian
banking system is not a complicated one, since no private capital
or individual management is involved. Its volume of circulating
medium is dependent upon the will of the government, and is
limited only by the amount which will circulate without serious
depreciation. As previously stated the paper currency is worth
but 66J per cent, of gold, but the government aims to hold it
at this point. This can only be done by strengthening the gold
reserve, and the financial policy of the government is to do
this. In case of hard times the government increases the volume
of money sufficient to slightly raise prices and stimulate produc-
tion. This is the elasticity of the Russian system of currency.




© Art Branch Inc. | English Dictionary