ARMY SERVICE FORCES MANUAL M 35 -5 REVISED

MILITARY GOVERNMENT HANDBOOK SECTION 5: MONEY AND BANKING

STE I C O N 1 ,,

- DISSEMINATION OF RESTRICTED MATTER. No person is entitled solely by virtue of his grade or position to knowl- edge or possession of classified matter. Such matter is entrusted only to those individuals whose official duties require such knowledge or possession. (See also paragraph 23b, AR 380-5, 15 March 1944.)

HEADQUARTERS, ARMY SERVICE FORCES. MARCH 1945 ARMY SERVICE FORCES MANUAL M356-5 CIVIL AFFAIRS _ This manual supersedes Army Service Forces Manual M356-5, 7 April 1944.

MILITARY GOVERNMENT HANDBOOK GERMANY SECTION 5: MONEY AND BANKING

Headquarters Army Service Forces, March 1945

U 0 DISSEMINATION OF RESTRICTED MATTER. No person is entitled solely by virtue of his grade or position to knowl- edge or possession of classified matter. Such matter is entrusted only to those individuals whose official duties require such knowledge or possession. (See also paragraph 23b, AR 380-5, 15 March 1944.)

United States Government Printing Office, Washington, 1945 NUMBERING SYSTEM OF ARMY SERVICE FORCES MANUALS

The main subject matter of each Army Service Forces Manual is indi- cated by consecutive numbering within the following categories:

M1- M99 Basic and Advanced Training M100-M199 Army Specialized Training Program and Pre-Induc- tion Training M200-M299 Personnel and Morale M300-M399 Civil Affairs M400-M499 Supply and Transportation M500-M599 Fiscal M600-M699 Procurement and Production M700-M799 Administration M800-M899 Miscellaneous M900-up Equipment, Materiel, Housing and Construction.

* * * *

HEADQUARTERS, ARMY SERVICE FORCES Washington 25, D. C., 10 March 1945

Army Service Forces Manual M356-5, Military Government Handbook, Germany, Section 5, Money and Banking, has been prepared under the supervision of The Provost Marshal General, and is published for the in- formation and guidance of all concerned.

[SPX 461 (21 Sep 43)]

BY COMMAND OF LIEUTENANT GENERAL SOMERVELL: OFFICIAL: W. D. STYER J. A. ULIO Lieutenant General USA Major General Chief of ta The Adjutant General DISTRIBUTION : AAF (5); AGF (5); ASF (2); Special Distribution. This study on Money and Banking in Germany was prepared

for the

MILITARY GOVERNMENT DIVISION, OFFICE OF THE

PROVOST MARSHAL GENERAL

by the

DIVISION OF RESEARCH AND STATISTICS, BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

Officers using this handbook are requested to make suggestions and criticisms indicating the revisions or additions which would make it more useful for their purposes. These criticisms should be sent to Chief of The Liaison and Studies Branch, Military Government Division, PMGO, Wash- ington 25, D. C. INTRODUCTION

Purposes of the Military Government Handbook The basic purposes of civil affairs officers are (1) to assist the Com- manding General by quickly establishing those orderly conditions which will contribute most effectively to the conduct of military operations; (2) to reduce to a minimum the human suffering and the material damage resulting from disorder; and (3) to create the conditions which will make it possible for civilian agencies to function effectively. The preparation of Military Government Handbooks is a part of the effort to carry out these responsibilities as efficiently and humanely as is possible. The Handbooks do not deal with plans or policies (which will depend upon changing and unpredictable developments). It should be clearly understood that they do not imply any given official program of action. They are, rather, ready reference source books containing the basic, factual information needed for planning and policy making.

MILITARY GOVERNMENT HANDBOOKS TOPICAL OUTLINE

1. Geographical and Social Back- 10. Public Works and Utilities ground 11. Transportation Systems 2. Government and Administration 12. Communications 3. Legal Affairs 13. Public Health and Sanitation 4. Government Finance 14. Public Safety 5. Money and Banking 15. Education 6. Natural Resources 16. Public Welfare 7. Agriculture 17. Cultural Institutions 8. Industry and Commerce 18. Japanese Administration Over 9. Labor Occupied Areas

This study on Money and Banking in Germany was prepared for the Military Government Division, Office of The Provost Marshal General by the Division of Research and Statistics, Board of Governors of the Federal Reserve System.

iv CONTENTS

Page Page PART I. TRADITIONAL GERMAN BANKING SYSTEM. Reich: Handling Reich's payments and receipts; 1. The Period Preceding the First World War------12 Placing issues; Direct credits to the Reich-Con- (The - Incorporated commercial trol of the money and capital markets-Stock -Private bankers-Credit cooperatives- market control - Functions under foreign ex- Savings banks-Landschaften and private mort- change restrictions.) gage banks-Role of public institutions.) 4. Special Reichsbank Subsidiaries__------73 2. The First World War and Inflation Period (1914- (Deutsche Golddiskontbank-Konversionskasse 1923)-..------______16 fur deutsche Auslandsschulden-Deutsche Ver- (War finance-Reparations-Inflation-Fate of rerchnungskasse-Reichskreditkasse.) savings-Industrial combinations-Effects upon 80 commercial banks-Effect upon savings banks 5. Banking Supervision and Organization------and mortgage institutions.) (Supervisory authorities-Opening and closing of credit institutions-Standards for sound - 3. The Period of Reorganization Following the In- ing-Means of supervision-"Corporative" or- flation--...------..------. 21 ganization of credit institutions-Group agree- (The Rentenmark-Reconstruction of the Reichs- ments.) bank-Deflation-Revaluation and new debt Credit Institutions. structure-Rationalization and foreign loans- 6. Commercial Commercial banks-Savings and mortgage banks A. The Big Banks.- .------87 -Growth of public banking-Weaknesses of the (General characteristics - War-time opera- period.) tions - - - -Bank der deutschen Arbeit- - Berliner PART II. GROWTH OF TOTALITARIAN BANKING. Reichs-Kredit-Gesellschaft A.G. Handels-Gesellschaft - Joint participations 1. The Pre-war Period______------.. 29 in credit institutions.) (Fate of Germany's foreign indebtedness-Ex- B. Regional Banks------102 change control and clearing agreements for inter- C. State Banks Acting as Commercial Credit In- national transactions-The development of the stitutions------106 Reichsbank-Development of other credit insti- (The Preussische Staatsbank (Seehandlung) tutions: Reconstruction of credit institutions; -Other institutions.) Banking supervision; Corporative organization of the credit institutions-Control of interest rates D. Private Bankers ..------109 and the capital market-Financing of recovery (Business organizations and functions-The and rearmament: September 1932 to September "" process.) 1936; October 1936 to the outbreak of war.) 7. Credit Cooperatives------112 2. War-time Developments__--______----44 (Number of credit cooperatives-Organization- (The principles of German war finance-War-time Deposits and other resources-Distribution of financing of the Reich through credit institu- assets-The cooperative Zentralkassen-Invest- tions-Ownership of the Reich debt: end of ment in Reich paper-The Deutsche Zentral- 1943-War-time borrowing instruments-De- genossenschaftskasse.) velopment of the capital market-Success of price stabilization-Changes in the banking struc- 8. German System------119 ture-Effects of air raids.) (Savings institutions other than savings banks- Structure of the savings bank system-The sav- PART III. PRESENT MONETARY AND BANKING SYSTEM. ings banks: Savings deposits and other liabilities; Main assets - Girozentralen - Deutsche Giron- 1. Monetary Standardand Currency_------57 zentrale-Deutsche Kommunalbank.) (Development of monetary circulation-Reichs- 129 bank notes-Rentenbank notes-Subsidiary coin 9. Mortgage Bond Institutions------Occupation .) (Mortgage banks in corporate form-Public mort- gage institutions on cooperative principles: The 2. Monetary Transfers Without the Use of Currency-_ 63 Landschaften; The Stadtschaften - Other public (The Reichsbank -system-The postal giro- mortgage institutions.) system-The giro-system of the savings banks Institutions for Financing Industrial In- (Spargiroverkehr) - Other giro systems - The 10. Special 137 clearing of checks.) vestment, etc.------(Industrial investment financing-Banks for in- 3. The Deutsche Reichsbank-_..------66 dividual industries or concerns-Financing house (Legal status and organization-Internal organi- construction, etc.-Mortgage loans for ship con- zation and branches-Authorized transactions- struction-Finance companies-Deutsche Indus- The Reichsbank as a banker's bank-Banking triebank, Berlin-Deutsche Bau-und Bodenbank supervision-The Reichsbank as banker of the A.G., Berlin-Deutsche Gesellschaft fur offent- CONTENTS-Continued

Page liche Arbeiten A.G., Berlin (Offa)-Deutsche 13. Stock Exchanges___.. .._-..__._-- . __...... _ 165 Verkehrs-Kreditbank A.G., Berlin-Bank der (Administration and organization-Issues listed Deutschen Luftfahrt.) on the exchanges-Trading methods-Clearing and settling transactions-War-time control of 11. Agricultural Credit Institutions_---__..------147 share prices.) (Agricultural indebtedness-Sources of agricul- APPENDIX. tural credit - Deutsche Rentenbank-Kreditan- stalt-Deutsche Rentenbank-Other agricultural General Banking Statistics______------171 mortgage institutions-Special institutions for (Deutsche Reichsbank-Deutsche Golddiskontbank- rural settlement - Special institutions for Per- Postal checking and savings-Deutsche Verrechnungs- sonalkredit.) kasse - Konversionskasse fiir deutsche Auslands- schulden - Reichskreditkasse - Overseas banks - 12. Insurance Companies..-.. __------156 Landschaften - Deutsche Industriebank - Deutsche (Legislation-Structure of the private insurance Gesellschaft fir offentliche Arbeiten-Special insti- industry-Public insurance companies-Invest- tutions financing industry, etc.-Deutsche Renten- ments-War-time operations.) bank-Kreditanstalt.) SUMMARY

The following report is divided into three War. During the war, the resources of the principal parts, of which the third is much the banking system were placed at the disposal most extensive. Part I, "The Traditional Ger- of the Reich, which financed a large proportion man Banking System", briefly reviews the de- of its war expenditures by borrowing newly- velopment of currency and credit institutions created money from the Reichsbank. The in- before the great crisis of 1931, which marks flationary expansion of the money supply did the end of "free" banking in Germany. Part not cease with the Armistice, however, since II, "The Growth of Totalitarian Banking", in the desperate years which folowed the war, describes in general terms the transformation the Government continued to finance through of Germany's credit institutions into instru- the Reichsbank its heavy burden of commit- ments of the totalitarian state. The second half ments for reconstruction and reparations. of this Part, dealing with war-time develop- Social unrest and political disorder set the ments, indicates particularly the role of the stage for "runaway" inflation, which assumed banking system in German war finance. Part a gigantic scale with the occupation of the III, "The Present Monetary and Banking Sys- Ruhr and the Government's vast subsidies to tem", analyzes in detail the complicated struc- the passive resistance of that area. Amidst an ture of institutions comprised in this system. orgy of speculation, the value of the currency For the most part, statistical evidence is pre- depreciated to "something more ridiculous than sented for the war years through the end of zero". 1943. This disintegrating process was brought to an end late in 1923 with the foundation of the Part I Deutsche Rentenbank, which issued a new cur- The formative period of the modern German rency (the Rentenmark), having the same ex- banking system was the decades following the change value as the pre-war and secured unification of the Reich in 1871. The new poli- by a collective mortgage imposed on all German tical pattern called for an integrated banking industry and agriculture. The exchange rate system, and especially for a of between the new Rentenmark and the inflated issue which was provided in 1875 when the Reichsbank currency became one trillion to Reichsbank was created out of the Preussische one. In the following year, however, pursuant Bank. Several large incorporated banks had to the for rehabilitating German been founded in the 1850's, but the two des- finance and collecting reparations, the Reichs- tined eventually to dominate the field- the bank was reorganized and in August 1924 re- Deutsche Bank and Dresdner Bank-appeared sumed its role as bank of issue, emitting a new early in the 1870's. These banks characteris- currency at parity with the Ren- tically combined commercial and investment tenmark. banking, and played a strategic role in Ger- Although the German currency now had the many's phenomenal industrial development same gold value as before the war, all money prior to the first World War. Numerous smaller claims in pre-war Marks had been virtually institutions-private bankers, credit coopera- wiped out by the depreciation of that unit. tives, savings banks, mortgage banks, etc.- The impact of this development was partially were already on the scene and gradually de- modified by a complex series of laws revaluing veloped coordination in their respective fields pre-stabilization claims of a long-term charac- over the whole area of the Reich. While the ter such as bonds, mortgages, and savings de- Reichsbank remained the only Reich banking posits. Generally speaking, however, the money institution until the war, a conglomeration of savings of the German public were destroyed, State and provincial institutions, engaged with permanent effects on the social structure mainly in mortgage credit and loans to public (especially the pauperization of the middle bodies, was inherited from the earlier days. Of class). On the other hand, some classes profited these, the Preussische Staatsbank (Seehand- from the inflation: notably the farmers, whose lung), founded in 1772, was outstanding; it also debts were largely dissolved although they re- conducted commercial banking operations and mained in a parlous state; and certain large was an influential factor in the Berlin money industrial and financial interests which amassed market. vast speculative fortunes by investing borrowed The dynamic development of Germany's eco- funds in tangible properties which survived nomic and financial power was abruptly ter- the monetary debacle. Although in principle minated with the outbreak of the first World the banking system stood in a neutral position, with both assets and liabilities largely stated Germany's position in international trade, and in money terms, it was shaken to its founda- to facilitate internal financial experiments tions by the disorder and distress attending the which would have collapsed under the impact inflation; especially the savings banks, credit of free market forces. Germany became a cooperatives, and mortgage institutions emerged closed economy with a currency sustained not from the ordeal in a sadly deflated state. by gold and exchange reserves but by totali- The span of years between stabilization in tarian control over prices, wages, interest rates, 1923-24 and the onset of the world depression and profits. Economic activity, fallen to a low in 1930-31 was marked by steady progress in ebb after the financial crisis, was gradually the rationalization and consolidation of the revived by reemployment and recovery meas- banking system. During the period, the Reich ures initiated by the pre-Hitler regimes and entered the banking field on an extensive scale extended on an increasing scale by the Nazis. with the foundation of various special institu- Imperceptibly, these measures, originally con- tions with important financial functions. The ceived as weapons against economic depression, whole recovery program was sustained by an developed into instruments for rearming the influx of foreign capital, especially from the Reich for the next World War. The Reich pro- United States, and in fact appears to have grams relied largely upon financial devices of become so dependent upon this factor that the a potentially inflationary character, and after first signs of a diminution of the capital flow full employment was achieved in 1935-36, the in 1929-30 produced symptoms of distress in continued expansion of money and credit ne- Germany. Superficially, however, there was a cessitated increasingly stringent control over remarkable degree of prosperity-commercial the price-wage structure to avoid depreciation banks actively supported a renewed expansion in the value of the currency. The distribution of trade and industry, savings deposits were of income, the volume of savings, and the rapidly reconstituted, and agricultural credit direction of investment were all manipulated was much in demand for financing the exten- to the end of enlisting resources for the re- sion of farming activities. The private sector armament program. The Reich's fiscal policy, of the banking system thus found itself fully like many other elements in Germany's eco- engaged, despite increasing competition from nomic organization, was on a war-time basis the public sector, where new institutions were long before September 1939. founded to direct public funds-and the pro- As might be expected, German Banking in- ceeds of foreign loans-into many forms of stitutions became regimented under the Nazi economic activity. regime as much as all other economic enter- prises. Of critical importance was the transfor- Part II mation of the Reichsbank from an independent The world economic and financial crisis of currency authority with a measure of inter- 1931 had its first important manifestation in national control into a subservient instrument Central Europe, first in and then in of the Reich Government's fiscal policy. Already Germany. The crisis grew out of a compound in 1933, all effective limitations on the volume of basic economic disequilibria and financial of its note issue were discarded, and control disorders, but it first emerged on a large scale over the institution was firmly established in in the form of panic withdrawals of short- government hands. The leading commercial term funds from Central Europe by creditors banks, most of them thoroughly shaken by the in the Western countries, including the United events of 1931-32 and already before Hitler States. Germany's gold and exchange reserves heavily infiltrated by government influence, were rapidly dissipated in meeting this outflow, were similarly harnessed to the financial pro- and despite the moratorium on reparations pay- grams of the Reich. The Government-or Reich ments in July 1931, payments to foreign credi- institutions-actually acquired ownership of tors had to be suspended and close government a large portion of the commercial banking control had to be established over all inter- system during the crisis, but most of such in- national transactions. The loss of international terests were "reprivatized" in 1937. By that confidence promptly produced a domestic bank- time the whole banking structure was so thor- ing crisis in Germany, again necessitating dras- oughly regimented that ownership of individual tic governmental intervention. These develop- institutions was superfluous as a measure of ments were the starting point for great control. structural changes in the monetary and banking Over-all government supervision of banking sphere which, as further exploited under the activities, also initiated before Hitler as a Nazi regime, brought Germany a "totalitarian" result of the glaring weaknesses revealed by financial system. the banking crisis, was developed by the Nazis The severance of free exchange relations into a virtual strait-jacket for credit institu- with the outside world, originally adopted as tions. A general law of 1934, amended in detail an emergency measure, conferred upon the in 1939, subjected all credit activities to gov- Nazi Reich a weapon which was deliberately ernment inspection and established rigid stand- used to exploit foreign creditors, to aggrandize ards of "sound banking". Meanwhile, through personal ana political pressure, credit institu- firmly immobilized, and the mass of currency tions were induced to follow the official line and bank deposits in the hands of the German laid down by Nazi authorities. Furthermore, public constitutes a formidable inflationary in accordance with the general "corporative" potential. Only the most stringent rationing organization of the German economy, all credit and price control has enabled this purchasing institutions were forced in 1934 to become power to be dammed up. Totalitarian control members of the Nazi-dominated Reichsgruppe over the public's spending has succeeded, how- Banken. Ostensibly an organization for self- ever, in preventing any large rise in the general administration by the banking system, the price level. In short, while the high volume Reichsgruppe is in fact just one more mani- of personal incomes stimulated by war expendi- festation of the pervasive government influence tures has greatly exceeded-even after heavy in the credit structure. Through this and other taxes-the value of the limited supply of goods instruments, close Reich control was established allocated to the civilian economy, the public even over the widely-scattered and decentralized has had more or less perforce to hold the dif- savings banks, credit cooperatives, and other ference in liquid form. local credit institutions. Throughout the period of totalitarian bank- Under these circumstances, the outbreak of ing there have been few fundamental institu- the war and the changeover from rearmament tional changes. There has been a general ten- to war finance put no special strain on the dency toward consolidation and mergers of banking machinery. It was only necessary to individual institutions, first stimulated by bank accelerate the tempo of credit activity in order failures in the 1931 crisis and manifested on to meet the vastly increased fiscal requirements frequent occasions in later years. The closer of the Reich. Credit institutions have played coordination of institutions serving common a particularly vital role in German war finance interests has resulted in some strengthening of because of the Reich's deliberate policy of bor- central organizations. Finally some classes of rowing through such institutions rather than banks have developed much more dynamically direct from the general public. In the four than others. The savings bank and credit co- years 1939-43, inclusive, genuine new borrow- operative systems have shown a remarkable ing by the Reich is estimated at RM 216 billion, growth, especially during the war period, and or some 47 per of total government ex- most commerical banks have expanded very penditures. Some RM 34 billion was borrowed substantially. Mortgage banking, on the other from foreign sources, and of the remaining hand, has stagnated since 1931; it suffered a 182 billion obtained from domestic sources, it shock from the reorganization of mortgage is estimated that almost 90 per cent (all but credit after the crisis-especially in agriculture 20 billion) came from banking and insurance -and in recent years has had little scope be- institutions. In fact, at the end of 1943, only cause of the concentration of investment in about 10 per cent of the internal debt of the public projects. Reich was held directly by the German public. The territorial expansion of the Reich com- This process has resulted in a marked change mencing with the in 1938 has in the character of banking assets. At the end widened the German currency and banking area of 1943, the Reichsbank held 94 per cent of to an important degree. Institutions in the its assets in the form of claims on the Reich annexed areas have been closely incorporated as compared with 62 per cent in 1938; during into the banking system of the Reich. One the same period, the corresponding percentages public banking institution operating beyond rose from 21 to 60 for the six big Berlin com- the borders of the Reich is the Reichskredit- mercial banks, from 26 to 77 for the savings kasse, which under the administration of the bank system, and from 12 to 71 for the credit Reichsbank has raised forced loans in occupied cooperative system. and satellite countries by issuing notes and Of course, the domestic money savings which borrowing from local central banks. have flowed to the Reich through financial in- stitutions have originated with the general Part III public, which has acquired a corresponding volume of claims in the form of bank notes, Monetary standard and currency bank deposits, and potential policy claims on Germany is on an irredeemable paper stand- insurance institutions. The combined note issue ard with rigid restrictions on international ex- of the Reichsbank and Rentenbank increased change and official exchange rates which for by RM 26 billion in 1939-42, while deposits a long time greatly over-valued the Reichsmark. held by the public with credit institutions (in- The monetary circulation consists of Reichs- cluding the postal checking and savings system) bank notes (RM 5 to RM 1,000), Rentenbank rose by RM 116 billion. Of the increase in bank notes (RM 2 and 1), and subsidiary coin (RM deposits, 60 per cent took the form of savings 5 down to Rpf 1). The Reichsbank notes are deposits, more than half of which accumulated backed by commercial and Treasury bills with the savings banks alone. (mainly the latter), and the notes of the Ren- Even savings deposits, however, are not very tenbank by a debt of the Reich to that institu- tion. Subsidiary coins are minted from silver, through the Reichsbank to credit institutions aluminum, aluminum-bronze, and zinc. Only in general, and it places special Reich loans the Reichsbank notes have unlimited legal ten- (Li-loan) with savings banks, credit coopera- der quality. As a result of annexations the area tives, etc. Direct advances to the Reich are in which the Reichsmark is sole legal tender granted partly in the form of working credits, has greatly increased since 1938. Partly be- but mostly by discounting Reichswechsel, a cause of this factor, but as a result of the special form of non-interest-bearing Treasury great war-time increase in national income bills. Such bills are the main asset of the insti- and money savings and of the hoarding of tution and the bulk of the note cover. The currency against contingencies (air raids, etc.) amounts of working credits to be granted and the note circulation of the Reichsbank rose of Reichswechsel to be discounted are to be from RM 8 billion at the end of 1938 to RM determined by the FUhrer. 34 billion at the end of 1943. During the mili- The traditional means of influencing the tary campaigns, special Reichsmark currency money and capital markets (discount rate, open has been issued in occupied territories which market operations, etc.) remain at the dis- is not legal tender in the Reich and is backed posal of the Reichsbank, but since the early mainly by a claim against the Reich by the years of the Nazi regime have been greatly issuing institution (the Reichskreditkasse). In overshadowed by direct methods for regu- most occupied areas this currency is no longer lating interest rates and the flow of funds. in general circulation; the outstanding amount Furthermore the Reichsbank has lost any in- at the end of 1943 was RM 2.9 billion. dependence of action, being entirely dominated by the government (in particular, the Reichs- Monetary transfers without use of currency wirtschaftsministerium). This Ministry is by Cashless transfers play a very important law accorded very broad powers over the money role in Germany. The use of checks is little market and credit system, which it exercises developed but extensive facilities for cashless in consultation with the Reichsbank. The Minis- payments in the form of "giro-transfers" are try and the Reichsbank also share in the con- provided by the Reichsbank, the Reichpost, and trol of new security issues, in practice reserving the savings bank system. These payments in- the capital market for Reich issues or loans volve book transfers, initiated by the payor, to public and private enterprises serving the in accounts carried by payor and payee with needs of totalitarian economy. The capital mar- one of the giro-systems. The Reichsbank system ket control is complemented by stock market leads in volume, and that of the Reichspost in control, the Reichsbank's part being to operate number of transactions; that of the Reichs- a "manipulation fund" established by requisi- bank is characterized by very large payments, tioning certain holdings of securities. those of the Reichspost and savings banks by Foreign exchange policies are also deter- relatively small payments. The clearing of mined by the Reichswirtschaftsministerium checks and other instruments (including local rather than the Reichsbank. However, together giro-transfers) is carried out through the so- with its subsidiaries, the Reichsbank plays an called Abrechnungsverkehr administered by important part in the administration of for- the Reichsbank and its branches. eign exchange restrictions. It holds a monoply for dealing in foreign exchange, etc. A gold Deutsche Reichsbank and foreign exchange backing for its notes The Deutsche Reichsbank, a public corpora- is not required, and the gold and foreign ex- tion formally under the supervision of the change reserves shown in its statements are Fiihrer, is Germany's central bank of issue. only part of the official German holdings. The President of the institution (at present the Reichswirtschaftsminister, Dr. Walther Special Reichsbank subsidiaries Funk) decides on all issues, the other members The Reichsbank has four closely affiliated of its governing body having only advisory institutions which for conveniences are de- capacity. scribed as Reichsbank subsidiaries, although The Reichsbank acts as a banker's bank, only one of them, the Deutsche Golddiskont- holding the liquid reserves of credit institu- bank, is linked to the Reichsbank by share- tions (on giro-account) and standing ready holdings. The other three-the Konversions- to grant them credit by rediscounting bills, kasso fur deutsche Auslandsschulden, the making advances against collateral (Lombard Deutsche Verrechnungskasse, and the Reichs- loans), etc. While still performing the tasks kreditkasse-are all public institutions ad- of a banker's bank, under the Hitler regime ministered by the Reichsbank and staffed the Reichsbank's principal role has become that largely with Reichsbank personnel. The four of banker to the Reich. It handles the Reich's institutions deal with various aspects of the payments and receipts, places its security Reich's international financial transactions, issues, and grants direct credits to the govern- although most of the activities of the Deutsche ment. Treasury bills and notes are issued Golddiskontbank now lie in the domestic field. The Reichsbank has used the Deutsche Gold- legal forms. The broad powers of the Reichs- diskontbank (abridged Dego), founded in wirtschaftsminister in regulating structural 1924, to perform a wide variety of duties which changes in credit institutions has enabled the the Reichsbank was not itself permitted to government to control closely the integration undertake. Before the war this institution was of the banking system in the annexed territories prominent in financing and subsidizing exports, with that in the Reich and the penetration although in recent years this work has been movement of German banking into foreign less important because of Germany's economic areas (especially Central and Southeastern and political domination of her principal re- Europe). The Reichswirtschaftminister (in co- maining trade partners. In the domestic field, operation with other authorities) carried out the Dego has assisted the Reichsbank in money in 1942-43 a rationalization of the banking market operations by issuing short-term instru- structure in Germany with a view to releasing ments (sola-bills) as an investment for credit manpower and materials for the war effort. institutions, using the proceeds to relieve the In the framework of the "corporative" or- Reichsbank of some of its bill holdings. ganization of the German economy, credit in- The Konversionskasse fiur deutsche Aus- stitutions are organized on a compulsory basis landsschulden was established in 1933 when in the Reichsgruppe Banken. This organization, Germany declared a transfer moratorium on headed by an appointee of the Reichswirts- long- and medium-term foreign investments. chaftsminister, is subdivided on functional It receives interest and amortization payments lines into Wirtschaftsgruppen (comprising from German debtors, and administers these private credit institutions, savings banks, etc.), funds (over RM 1 billion in mid-1944) for and is represented in the regional Gauwirts- account of the creditors, mainly by investing chaftskammern. The most important function them in Reich paper. of the Wirtschaftsgruppen is to conclude group The Deutsche Verrechnungskasse was estab- agreements concerning interest rates and other lished in 1934 to act as the German agency for competitive practices. Such agreements, when carrying out clearing transactions between approved by the Reichsaufsichtsamt, are bind- Germany and other countries. During the war ing upon all credit institutions in the Reich. The the extremely one-sided character of payments present structure of interest rates paid and between Germany and other European coun- charged became effective on May 1, 1940. tries, particularly the occupied countries, has led to the accumulation of large clearing Commercial credit institutions balances in Berlin. The bulk of these balances, Outstanding among the commercial credit amounting to some 17 billion in mid-1943, is institutions are the 6 Berliner Grossbanken assumed to have been invested in Reich paper. with total assets of almost RM 26 billion at the The Reichskreditkasse is a war-time agency end of 1943. They consist of the Deutsche Bank, concerned with financing German military op- Dresdner Bank, Commerzbank, Reichs-Kredit- erations in the field. It has provided funds Gesellschaft (owned by the Reich), Berliner (partly in the form of occupation currency) Handels-Gesellschaft, and the Bank der Deuts- for the Army's expenditures in occupied and chen Arbeit (owned by the German Labor satellite countries, and has rendered emer- Front). The first three are large branch banks, gency banking services to the general public with a widely diversified clientele; the next in occupied areas where the normal banking two are smaller institutions with only a head system has broken down. Its principal asset- office in Berlin, catering mainly to big indus- and the backing for its note issue-is a special trial customers; the Bank der Deutschen Ar- claim on the Reich Treasury. beit (now the third largest Grossbank) is a special case, being a relatively new arrival Banking supervision and organization which relies less on industrial connections than The Rdichswirtschaftsminriser is the su- on its political patronage. preme authority in banking affairs. In Septem- German commercial banks have characteris- ber 1944, he and the Reichsbank took over the tically combined commercial and investment powers of the dissolved Reichsaufsichtsamt fir banking; they seek to meet practically all the das Kreditwesen, an agency which had been short- and long-term credit and capital de- established to implement the Reich Credit Law mands of their customers and to maintain close of September 25, 1939 (originally December relations with industry. However, restrictions 5, 1934). This law subjects all credit institu- on new capital issues and on stock market tions to Reich supervision, compels them to transactions have greatly curtailed their ac- submit regular reports, etc.; it also sets a tivities in the capital market, while the general series of standards for "sound banking", most liquidity of industry and commerce during the of which, however, have never been imple- war period has restricted the demand for com- mented by specific regulations. To a consider- mercial credit. The Grossbanken have there- able extent, the "Gleichschaltung" of the bank- fore increasingly assumed the character of ing system has been accomplished by personal savings institutions, investing a highly inflated and political pressure rather than through volume of deposits mainly in Reich paper (more than 60 per cent of total assets in 1943). The for short-term small farmers. These small local three big branch banks have expanded into enterprises are welded together through a num- annexed areas and have participated actively ber of urban and rural head institutions for in the foreign penetration movement; on the specific regions (the Zentralkassen) and the other hand, the rationalization movement in whole system is headed by a central Reich in- German banking effected a drastic curtailment stitution (the Deutsche Zentralgenossenschafts- of their branch networks. kasse or "Deutschlandskasse"). The Zentral- Regional banks are private institutions con- kassen were devised mainly to direct the flow fining their operations to a specific region, of funds within a given region from coopera- within which many of them maintain branch tives with surplus deposits to those in need networks. The 125 institutions making up the of funds. Similarly the original idea of the group in 1942 had total assets of about RM Deutschlandkasse was to direct funds from 10 billion, but only five of them had assets one region to another or to inject into the sys- exceeding RM 500 million. Regional banks are tem through the Zentralkassen new funds strongest in Central Germany (), Ba- raised by central borrowing or from Reich varia, and in Austria. After the "Anschluss" subsidies. In recent years, however, and par- two large regional banks emerged in , ticularly during the war period, the member the Creditanstalt-Bankevrein (controlled by cooperatives as a whole have developed an the Deutsche Bank) and the Liinderbank impressive volume of surplus deposits, much (controlled by the Dresdner Bank). The ra- of which has flowed upstream to the Zentral- tionalization movement has strengthened some kassen and thence in part to the Deutschland- of the individual institutions through mergers kasse. Total deposits with the urban and rural with competing banks. credit cooperatives rose from RM 2.6 and State banks in , , Saxony, RM 3.5 billion in 1938 to RM 9.3 and RM 13.5 and Thuringia are classified as commercial billion, respectively, at the end of 1943. The banks because their activities are primarily balance sheets of the Zentralkassen have greatly of a commercial character. However, these are expanded, and the total assets of the Deutsch- public institutions which administer the liquid landkasse, which amounted to scarcely RM 0.6 funds of their respective States (and State- billion in 1938, reached RM 6.8 billion at the controlled enterprises), assist in financing these end of 1943. The surplus funds generated by bodies, and engage in long-term financing of the system, being greatly in excess of the or- projects in the public interest (often out of dinary credit demands upon the cooperatives, public funds). Much the largest of these in- have been largely invested in Reich paper, to stitutions is the Preussische Staatsbank (See- some extent by the credit cooperatives them- handlung)-total assets RM 2.6 billion in 1943; selves but especially by the Zentralkassen and it has various important public functions and the Deutschlandkasse. used to be a large-scale lender on the Berlin money market. German savings bank system Individual private bankers have always Whereas the credit cooperatives are devised played an important part in German banking mainly to meet the credit needs of the small as investment bankers and as a channel for income grops, the savings banks are designed contacts with foreign banks, but the group as primarily to provide a safe form of investment a whole has been declining in importance for for savings. These banks, of which there are several decades. Under the Hitler regime a almost 2,000 representing in the aggregate the serious blow was dealt to the group when largest reservoir of savings in Germany, are Jewish firms were "aryanized", i.e. given new public institutions administered and guaran- "Aryan" partners or absorbed by other insti- teed by local municipalities. Here again a struc- tutions. The 511 firms still existing in 1941 ture has been developed of 24 regional head had total assets of nearly RM 2 billion, but institutions (Girozentralen), primarily devised of the whole group only 7 firms had assets to hold the required liquidity reserves of the exceeding RM 50 million. The largest and most savings banks and to provide clearing facili- influential firm is Merck, Finck and Co., Miin- ties for cashless transfers between the special chen-Berlin, notable especially for its influence giro-accounts which may be maintained with in the insurance field. such banks. The system as a whole is topped Credit cooperatives. Cooperative banks, by the Deutsche Girozentrale-Deutsche Kom- formed by groups of individuals as a means munalbank, Berlin (D.G.Z.), which holds the of self-help, have developed in two forms: required liquidity reserves of the regional Giro- the 1,900 urban or commercial credit coopera- zentralen and connects the system as a whole tives, generally with limited liability of their with the central money market. members and intended to meet the short-term Traditionally, the savings banks have fos- credit needs of the small local business and tered the extension of credit to small and craftsmen; and some 20,000 rural credit co- medium-size local business and craftsmen, par- operatives, mainly with unlimited liability of ticularly through the granting of small mort- their members and designed to provide credit gage loans, and have provided a source of credit for the municipalities with which they the corresponding organization in the field of are associated. Under the Nazi regime, how- urban mortgage financing; 7 of the institutions ever, they have found such investment oppor- are members of the Preussische Zentralstadt- tunities (mortgage and municipal loans) dras- schaft, which by the end of 1942 had issued tically curtailed and have had to place their mortgage bonds on their behalf to the amount funds increasingly in Reich paper or simply of RM 288 million. in deposits with their head institutions. Savings deposits with Finally, many State and provincial institu- the savings banks increased from tions RM 18 billion in 1938 to almost RM 67 billion specialize in granting mortgage and mu- in 1943, while other nicipal loans financed by bond issues. The (i.e. giro) deposits rose Preussische from RM 3 to RM 12 billion. Here, as in the Landespfandbrief anstalt is promin- case of the ent in the field of urban mortgage credit, and credit cooperative system, the flow some of of funds upstream has greatly expanded the Gi- the Girozentralen-financedin part by rozentralen bond issues of the Deutsche Girozentrale- (total assets up from RM 6 to RM Deutsche 32 billion in 1938-43) and the D.G.Z. (total Kommunalbank-emphasize loans to municipalities. One large Reich institution in assets from RM 2 to RM 10 billion in the same the field period). Again the funds accumulating in the of agricultural credit, the Deutsche system have Landesrentenbank, issues a large volume of been invested mainly in Reich mortgage bonds. paper, whether by the savings banks, the re- gional Girozentralen, or the D.G.Z. Special institutions for financing industrial Mortgage bond institutions investment, etc. Prominent among the institutions granting A series of specialized institutions exist for mortgage credit are the mortgage bond insti- financing such diverse activities as industrial tutions, characterized by the fact that their investment, house construction, aircraft con- funds are raised largely by the issuance of struction, etc. Among them a few banks spon- bonds secured by their outstanding mortgage sored and supervised by the Reich, but or- (and municipal) loans. ganized in corporate form, far outrank all others. The Deutsche Industriebank A.G. (total The 29 mortgage banks in corporate form assets March grant mortgages mainly 1944: RM 1.4 billion), after on urban real estate having performed a variety of duties in the but also to some extent on agricultural prop- public interest, erty. The majority of is now devoted mainly to long- them are organized in and medium-term industrial financing, particu- two large groups: the Gempinschaftsgruppe larly for smaller Deutscher Hypothekenbanken, businesses. At the beginning a rather strict of the war, it was assigned the special task combination which pools profits and losses; of financing and the Arbeitsgemeinschaft the expansion of armament in- Deutscher Hypo- dustries and the conversion of industry to war thekenbanken und gemischter Banken, which production. Under rests on a much looser agreement. Due its auspices the Heeres- mainly Riistungskredit A.G. was established in 1943 to the standstill in house construction and to to take over the capital market from the Deutsche Industriebank control, mortgage financing credits to manufacturers of army equipment. was rather stagnant during the early war The Deutsche Gesellschaft years, the total of mortgage bonds fur off entliche Ar- outstanding beiten (Offa) (March 1942 total assets: RM for the 26 institutions remaining at about RM 323 million) 6.2 billion. However, was important as an acceptance in 1942 the mortgage institution in the reemployment period, and banks were authorized to grant "discharge its liquidation was loans", financed through the held up in the fall of 1939 issue of mortgage to meet special working capital needs of busi- bonds, to assist house owners in meeting a nesses suffering special tax liability falling from the impact of the war. due at the end of The Bank der deutschen Luftfahrt A.G., which that year. As a result of this factor, the cir- originated in August culation of mortgage bonds 1940 from the Luftfahrt- rose by some RM kontor G.m.b.H., is believed to be engaged 600 million in 1942. During the war there has mainly in financing been a marked tendency aircraft and aluminum to pay off mortgage production in Germany and in the occupied debts, which in 1943-44 forced the mortgage countries. banks to call some issues. Very few statistics are available for this institution, but already at the end of 1941, The other distinct groups of mortgage bond its total assets had reached RM 1.5 billion, institutions are the Landschaften and the exceeding those of the Deutsche Industriebank. Stadtschaften, public mortgage institutions on The Deutsche Bau- und Bodenbank (total cooperative principles. The 18 Landschaften assets end of 1943: RM 1.4 billion) fosters the and kindred institutions grant mortgage loans development of low-rental housing projects, to the large real estate owners of a specific especially by the granting of interim credits region. The circulation of their mortgage bonds during the period of construction, and exer- has remained stable during the war at around cises certain important trust functions on be- RM 1.2 billion. The 8 Stadtschaften represent half of the Reich in the field of housing finance.

7 The Deutsche Verkehrs-Kredit-Bank (total Insurance companies assets end of 1943: RM 3.3 billion) is the Insurance companies (excluding social insur- banking subsidiary of the Deutsche Reichs- ance institutions) are organized for the most bahn, devised to carry out the financial opera- part as private corporations, although there tions of that huge enterprise. are also a number of public companies owned by municipalities and other public bodies. Life Agricultural credit institutions insurance is much the most important branch Agricultural indebtedness has long been as measured by premium income, and accounts a problem commanding the special attention for a far larger volume of premium reserves of the German government. Although nearly and investments than any other branch. At wiped out by the inflation, it had been so effec- the end of 1943 total life insurance in force tively reconstituted by the time of the 1931 in Germany was about RM 48 billion, as com- crisis that the government had to intervene pared with RM 37 billion in 1940. Life insur- in drastic manner to save the agricultural com- ance companies may not engage directly in munity from disaster. Public funds were lav- other insurance lines, but in practice the private ished upon a debt adjustment program and the insurance field has become dominated by large whole system of mortgage credit was revamped. groups of companies ("Konzerne") carrying In recent years, generally speaking, new credits on the various insurance lines through nomin- have been granted only for special projects, ally separate companies under unified mana- while the regular indebtedness has been steadily gerial control. Much the largest of these groups amortized. is the Allianz Konzern, headed by the Allianz Agricultural credit is of two basic types, Versicherungs-A.G. and the Miinchner Riick- Realkredit-usually secured by mortgage-and versicherungsgesellschaft; the latter is a huge Personalkredit, outstanding in 1938 in the reinsurance organization which has played a amount of RM 11.4 and RM 2.8 billion, re- prominent role during the war period in or- spectively. Realkredit is provided by a wide ganizing a reinsurance pool for all of German variety of institutions (public institutions of Europe. various kinds, mortgage banks, etc.) as well All insurance companies must be members as by private persons. There is a central insti- of the Reichsgruppe Versicherungen, a unit in tution in this field, the Deutsche Rentenbank- the corporative organization of the German Kreditanstalt, which has made a large volume economy. They are subject to the close super- of long-term loans of various kinds through vision and direction of the Reichsaufsichtsamt other agricultural credit institutions (es- fir Versicherung, an agency under the Reichs- pecially mortgage bond institutions and State wirtschaftsministerium. Regulations are pre- and provincial banks). Part of its resources scribed with respect to premiums, investments, have been constituted by the receipt of special accounts, etc. Although mortgage loans were bonds issued by the Deutsche Rentenbank. formerly the predominant form of insurance investments, the lack of demand for such loans One special class of agricultural mortgage and constant pressure from the Reich has institutions (the Landschaften) has been dis- caused Reich securities to usurp first place in cussed in the section on mortgage bond insti- insurance company portfolios. It is believed tutions. Another special group is that financing that insurance companies contributed some RM rural settlement, a function discharged espe- 11 billion to the Reich in the years 1939-43 cially by the Deutsche Siedlungsbank, provid- inclusive, and that by the end of 1943 Reich ing interim credits, and the Deutsche Landes- securities constituted about three-fourths of rentenbank, which funds the interim credits their total assets. into long-term annuities. The average yield on investments has been In the field of Personalkredit, which is essen- sharply reduced by the change in their com- tially short-term in character, the most im- position, while the claims experience during portant role is played by the rural credit co- the war has shown a distinctly unfavorable operative system discussed in an earlier section. trend, especially in the life insurance field. Such credit is also supplied direct to farmers Life insurance companies have had to cover by other local banking institutions and-to an war risks on all outstanding policies without important degree-by private persons (mer- an increase in premium rates. The result has chants, etc.). In addition, large credits are ex- been a serious drain on their reserves, only tended in the form of "indirect" Personalkredit, slightly alleviated by the permitted imposition i.e. loans to those engaged in trading in or of a small non-recurrent charge on all policy- processing agricultural products. The most holders in the summer of 1943. significant form of this credit is the loans pro- vided by the Rentenbank-Kreditanstalt and a Stock exchanges syndicate of commercial banks for the purpose There are nine stock exchanges in Germany, of financing the storage of strategic grain re- of which much the most important is the one serves. in Berlin. The principal officers of each ex- change are named by the local quasi-govern- by official restrictions aimed at preventing un- mental Gauwirtschaftskammer, acting under wanted speculation, especially in equity shares. the general supervision of the Reichsfinanz- Despite heavy corporate taxation and further minister. Membership on the exchange is not limitations on dividend distributions, the offi- limited nor is it a property right; in practice, cial index of share prices rose from a little commercial banks are by far the most im- over 100 in August 1939 to 140 at the end of portant members since the bulk of the securi- 1940 and 160 in September 1941. The Nazi ties trading business is originated by the branch authorities realized that this movement re- networks of the big banks. Trading is on a flected in large part distrust in the value of cash basis, transactions for future settlement the currency, and gradually moved toward the having long been banned and margin trading elimination of free market forces on the ex- having been eliminated by credit regulations change. Share prices are now virtually frozen, issued during the war. Banks formerly were remaining below 160 through the own account, on and the index large traders for their 1943. The volume of transactions is now off the stock exchange floor, but this practice end of stringent govern- very limited, reflecting mainly sales by the has ceased with increasingly fund" ment control over securities trading. Reichsbank from a "manipulation In fact, at the present time trading on the created out of securities requisitioned from stock exchange has been virtually smothered large investors.

PART

This brief review of the growth of the "traditional" German banking system prior to 1931 gives a picture of how German banking operated under a free regime. The healthy structure which developed before the first World War was seriously undermined by the war and succeeding inflation. After the adoption of a new stable currency in 1923-24, there was a considerable recovery relying largely upon the artificial stimulus of foreign capital. The Reich increasingly invaded the banking field- in which the States and provinces were already prominent-but most credit institutions thrived until the acute financial crisis in 1931. This manual supersedes Army Service Forces Manual M356-5, 7 April 1944

PART I

TRADITIONAL GERMAN BANKING SYSTEM _ _

I. Period Preceding First World War (3) Agricultural credit was granted on a With the foundation of the in short-term basis by the rural credit coopera- 1871, Germany became an integrated economic tives, and on a long-term basis (mortgage area which allowed the development of a more financing) by the public Landschaften, and to extensive and more centralized banking system some extent by the incorporated mortgage Banking legis- banks and the savings banks. than had prevailed previously. (4) Urban mortgage financing was a spe- lation, corporation law, and similar matters banks and became the responsibility not of the several cialty of the incorporated mortgage States but of the Reich. Only certain branches the savings banks. banking system, such as the (5) Credit to public bodies (particularly the of the German States, provinces, and municipalities) was the savings banks and the banks operated and su- Kredit- or the Prussian prov- specialty of the "Oeffentlich-rechtliche pervised by the. States wesen" but it was also granted as a side line inces, were subject to special State law. banks. German banking has traditionally had the by the incorporated mortgage following characteristics: The Reichsbank (1) Division of labor is less extensive than in other countries, as for instance England. The newly created political pattern, in which Commercial and investment banking in particu- 26 States (Bundesstaaten) were united in 1871 lar are carried out by the same groups of insti- into the Reich, called for a uniform and central- tutions. ized monetary system. The Preussische Bank, (2) The influence of public banking is strong. which can be traced back to Frederick the Institutions of the Reich, the several States, Great of Prussia, was changed by the law of Prussian provinces, municipalities, etc. form, March 14, 1875, into the Reichsbank. The new under the name "Oeffentlich-rechtliches Kredit- institution, although its shares were privately wesen", an important sector of the German held, was supervised and directed by the Reich banking system. The public institutions com- and could be considered an agency of the Reich. pete practically in every field with those in the The Reichsbank became the heart of the private banking sector. German banking and credit system. It was the (3) Besides the larger banks in corporate central bank of the country, the custodian of form (commercial and mortgage banks), Ger- the gold reserve, and the ultimate source of many has developed a large number of institu- bank credit. It issued a new kind of currency, tions for the smaller business and income the "Reichsbanknote", and eventually received groups (savings banks and credit cooperatives). a monopoly for note issue in the Reich. In 1871 The cooperative movement, which is character- there were 32 note-issuing banks in the several istic of Germany in general, has gained a foot- States, but only four-the Banks of Baden, hold in banking. Bavaria, Saxony, and Wuerttemberg-survived The functional organization of the German the effects of the law of March 14, 1875. These banking system as it was firmly established at retained a limited note issue privilege until the beginning of the First World War may be December 31, 1935. indicated in the following grouping: With the foundation of the Reichsbank, Ger- (1) Commercial banking was conducted by many also made the important change from a the incorporated banks, (particularly the "D- silver to a , thus following the Banken"), private bankers, some of the State general trend of the time toward gold and away banks, and the urban credit cooperatives. As a from silver and bi-metallism. The foundation side line, it was developed by the municipal for the Reichsbank's gold stock was laid by the savings banks and some of the mortgage banks French war indemnity consisting of gold and in corporate form. foreign exchange; important additions were (2) The functions of the investment banker made to the stock through sales of silver for were performed by the commercial banks (par- gold in the international markets. ticularly the D-Banken), and the - The monetary unit was to be the "Mark" ers, along with their activities as commercial which was legally defined to contain 1/2790 banking institutions. kilogram of pure gold. Gold was coined at this 12 mint parity into 5, 10, and 20 M. pieces, which zations of German corporations. Most impor- were made legal tender. In 1909 an amendment tant, German industrial corporations, by lend- to the Banking Act of 1875 made the Reichs- ing capital to their customers, fostered orders bank notes also legal tender and redeemable in from abroad. It has been estimated that in the gold coin, thus fixing the selling price of gold decade preceding the First World War, Ger- at M. 2,790 a kilogram. At the same time, the many exported long-term capital amounting to Bank was committed to buy gold bullion at the between M. 1 and 1.5 billion annually. However, fixed price of M. 2,784 a kilogram. The founda- this was not a net capital export. Before the tion was thereby laid for exchange rates fluc- First World War, Germany often played the tuating only within narrow limits. To guarantee part of a capital-transforming country, lending the redemption of its notes and thus the main- on a long-term basis and borrowing on a short- tenance of the gold standard, the Bank was term basis from the larger creditor countries of obliged to maintain a reserve equal to at least western Europe, such as England, France, Hol- one-third of the circulating notes, consisting of land, and Switzerland. gold and German money other than Reichsbank notes (i.e. coins and Reich notes). The rest of Incorporated commercial banks the note cover was to consist exclusively of dis- counted commercial (not financial) bills with A sound monetary system was also a con- a maturity of not more than 90 days after the tributing factor in the conspicuous development day of discount. of the German commercial banking system, Reichsbank was primarily a "bankers' which comprised principally the "Aktien- The banken"-large bank", although business firms were not ex- incorporated banks, as distin- discounting. Banks that redis- guished from unincorporated banking houses. cluded from The Aktienbanken counted with the Reichsbank would in the first grew up in close contact with instance receive credit on giro account (Giro- German industry, fostering new enterprises guthaben), upon which they could draw at any and in turn drawing strength from industrial expansion. time if they wanted cash. In that case, the Reichsbank would issue its notes. The giro Some of the commercial. Aktienbanken had balances are comparable to the reserves of our been founded in the late 'forties and the early member banks with the Federal Reserve Banks, 'fifties, shortly preceding or following the except that, in the English banking system, no foundation of "the French Credit Mobilier reserve requirements were set by law. There (1852). To this group belonged the A. Schaaff- was not even a generally-observed conventional hausensche Bankverein (1848), the Darmstaed- ratio in Germany, although the Reichsbank ter Bank (Bank fuer Handel and Industrie) watched carefully the reserve position of the (1853), the Disconto Gesellschaft (1851), the commercial banks. Alegemeine Deutsche Credit-Anstalt (ADCA), In addition to rediscounting bills, the Reichs- and the Berliner Handels-Gesellschaft (1856). bank was authorized to grant "Lombarddarle- Another wave of bank establishment coincided hen" (Lombard loans), which are loans against with and followed the Franco-Prussian War clearly defined collateral. These loans bore an (1870-71). The Deutsche Bank was founded in interest rate one per cent higher than the dis- 1870, the Dresdner Bank in 1872. count rate and were not eligible as cover for In 1872, there were about 130 banks receiving the note issue. The Reichsbank was also author- deposits in Germany, but by 1914 most of the ized to buy bills and notes of the Reich, the liquid capital and credit resources were in the States, and other public bodies maturing not hands of about a dozen banks. Four of these- later than 90 days after purchase. These also the Deutsche Bank, the Dresdner Bank, the were excluded from the note cover, and the Darmstaedter Bank (Bank fuer Handel and amount that might be purchased was therefore Industrie), and the Disconto Gesellschaft-re- limited. When, at the beginning of the First ferred to as the D-Banken, greatly surpassed World War, treasury bills were admitted as all the others, both in resources and in volume note cover, the door to inflation was thrown of business. The growth of the D-Banken was wide open. due to Germany's rapid industrial development The stability of the German currency in the and also to a tendency toward consolidation, at pre-World War days was a contributing factor first in the form of group banking, whereby to the expansion of German foreign trade, the provincial institutions remaining formally in- value of which rose from M. 6,138 million in dependent were brought under control of a 1875 to M. 20,867 million in 1913. It was also a Berlin institution. As a result of this combina- significant factor in facilitating capital transac- tion process and of a policy of expansion tions between Germany and the rest of the through the opening of branches-often grow- world. Beginning in the last third of the 19th ing out of mergers with provincial banks and century, especially after 1890, Germany became bankers-the D-Banken had built up, even be- a capital exporting country on a large scale. fore the First World War, a nation-wide organi- German capital was invested in interest-bearing zation. This development was fostered by Ger- foreign securities and in foreign sales organi- many's political unity and the ease with which 13 the Aktienbanken could sell their shares in the relationship to the business, the bank often active capital market of the day. secured representation on the board of directors In the last decades of the 19th century, Ger- of the corporation, voting in the shareholders' many definitely completed the transition from meeting the shares not yet sold to the public, an agricultural to an industrial economy. The the shares placed as collateral with the bank, years after the Franco-Prussian War in par- and-by proxy-the shares held by its own ticular were characterized by a feverish rush customers. Contrary to common belief, how- to found industrial enterprises and for that ever, lasting participation in other enterprises reason were called the "Gruender-Jahre", or was not a deliberate policy of the German com- foundation years. It was in these years of ac- mercial banks. Beyond finding a safe and liquid celerated industrial development that the Ger- investment for part of their own resources, they man commercial banks developed their specific sought to perform the role of middlemen. pattern. Whereas American banks, and even Nevertheless, the banks quite often found them- more the British banks, emphasized deposit selves owners of large participations in indus- business and the employment of their funds in trial corporations as a result of a poor reception highly liquid assets, the German banks culti- for a new issue of securities, or because of the vated both commercial and investment bank- acquisition of collateral on defaulted loans. ing; in other words, they granted short-term The other commercial banking activities of credit, but also assisted industry and trade to the German Aktienbanken were similar to those meet their long-term capital needs. carried on by commercial banks in other coun- In German commercial banking, as in Eng- tries: receiving deposits, discounting commer- lish and European banking generally, the cur- cial bills, accepting drafts, and financing stock rent-account relationship between bank and exchange transactions. customer is important. The current account is not simply a checking account. In Germany, the Private bankers dis- checking account (Scheckkonto) is often While commercial banking was mainly in tinct from the "Kontokorrent". A current ac- the hands of the incorporated banks, some un- count may involve the accumulation of money incorporated banking houses - particularly claims on either side, the customer sometimes connected with the Berlin money market is those having a credit balance on which interest -were able to retain a leading position: e.g. allowed and sometimes a debit balance on which Mendelssohn und Co.; Del- not S. Bleichroeder; interest is charged. The relationship should brueck, Schickler und Co.; and also certain be confused with what is called an "overdraft", provincial bankers-Warburg und Co. of Ham- because in the current-account relationship burg, J. Dreyfus und Co. of Frankfurt a/M, "credit lines" have been arranged in advance, and Deichmann und Co. of Cologne. Before the permitting the customer a debit balance up to first World War, these houses took a prominent a specified amount for a specified time. part in industrial financing and international This current-account relationship was and loan activities; however, their influence waned remains the pivot of all transactions between with the rise of the big banks with their im- banks and industry in Germany. From this re- mensely larger resources. lationship often developed other activities of the banks, such as the promotion of new enter- Credit cooperatives prises, direct participation in industrial under- takings, and cooperation in management by Cooperative credit institutions (Kreditgenos- representation on the board of directors of a senschaften) have an important place in Ger- corporation. A business enterprise might start many and Central Europe. Among the founders in a small way with a checking-account rela- of the modern German cooperative movement, tionship, which developed into a current ac- Schulze-Delitzsch and Raiffeisen were the most count. The natural growth of the business renowned, and their names frequently recur in might make it advisable to incorporate and to the designation of credit cooperatives. The first place most of the shares with the public. The cooperative for commercial credit was estab- greater part of the capital was then usually lished in 1850. Urban credit cooperatives, also provided by a banking syndicate (Konsortium) called Schulze-Delitzsch cooperatives, were arranged by the bank which had served the founded to meet the credit demands of small- commercial needs of the business. The shares town businesses. Rural or agricultural credit would usually be placed eventually with the cooperatives, also called Raiffeisen cooperatives, investing public, quite often largely with de- were established to grant credits to peasants. positors of the banks in the syndicate. In the In most instances, the members of the rural same way, the bank participated in all other cooperatives had unlimited liability for the capital transactions in the life-time of the cor- debts of the cooperative. It was characteristic poration, such as the placing of additional of both types that credits could be granted to shares and the issue of bonds; finally, it pro- members only, whereas deposits might be re- moted mergers and carried out capital reduc- ceived from both members and non-members. tions and liquidations. As a result of this close Credits generally took the form of short-term commercial loans, co-signed or secured by col- corporations-to foster the clearing of trans- lateral; the rural cooperatives also granted fers among the many independent savings mortgage loans, though this was not intended banks of a given region. The first Girozentrale, by their founders. that of Saxony, was founded in 1909, and in Over the two types of credit cooperatives the following decades the movement spread (urban and rural) was a complicated and some- over the whole Reich. In some cases Girozen- what overlapping superstructure of central in- tralen were established as new institutions; in stitutions, headed on the side of the urban others, an existing regional institution was en- cooperatives by the Dresdner Bank, Genossen- trusted with acting as a Girozentrale; or a schaftsabteilung, and the Preussische Zentral- Girozentrale, originally established independ- genossenschaftskasse (after 1932 Deutsche ently, was combined with a regional institution. Zentralgenossenschaftskasse), and on the side The movement was highlighted in 1918 with of the rural cooperatives, by the Raiffeisenbank the establishment of a central institution for A. G. the whole savings bank system, the Deutsche Since the urban credit cooperatives engaged Girozentrale - Deutsche Kommunalbank, Ber- in granting commercial credit, it might be lin. expected that they would compete with the branches of the incorporated commercial banks. Landschaften and private mortgage banks This was not the case, however, since the co- It should be noted that Germany did not operatives concentrated on very small loans develop the type of investment banker special- which were not sought by the Aktienbanken. izing exclusively in underwriting and placing However, competition did develop between the security issues and related capital transactions. cooperatives, the small local private bankers, As pointed out earlier, all these functions had and the savings banks. been combined with commercial banking. Spe- cialization developed, however, in the field of Savings banks long-term mortgage financing in the rural and The German savings banks, strictly speaking, urban fields. have not been a part of Germany's commercial The oldest types of agricultural mortgage banking system, because commercial credit is banks are the Landschaften, public institutions only a sideline of their activities-in fact a established as a matter of self-aid by the aristo- highly disputed one. Their object has been to cratic owners of large estates (Rittergutsbe- encourage thrift and to provide safe and inter- sitzer) in some of the Prussian provinces. The est-bearing investment for the savings of the first, the Schlesische Landschaft, was founded lower-income groups. They are primarily in- in 1770 upon the personal initiative of Frederick vestment institutions, placing their funds in the Great, to meet the heavy indebtedness of first-mortgage loans and high-grade bonds. the aristocracy in Silesia after the Seven Years' The first savings banks were sponsored by War. humanitarians in the last decades of the 18th The main feature of the Landschaften was and the first decades of the 19th century. In their cooperative character, whereby the mem- Germany, the States very early took control of bers were entitled to mortgage loans and were the movement, and the savings banks became severally liable for all the debts of the Land- institutions of the municipalities, such as schaft. In the earlier Landschaften membership towns, villages, and counties (Staedte, Doerfer, was compulsory for all owners of a Rittergut Kreise) under special state laws and under in the Prussian province concerned, and the supervision of the individual States. Until 1931, owners had unlimited liability for the debts of when they were made independent legal enti- the Landschaft. In the course of time, new ties, the savings banks were merely agencies of types of Landschaften were organized with vol- a municipality. They were organized without untary membership and limited liability. In initial capital funds, but they built up reserves 1933-34 the limited liability feature was also out of profits and their liabilities were guaran- adopted by the older Landschaften. teed unconditionally by the municipality con- The members of the Landschaft were entitled cerned. to mortgage loans on their estates, which they The funds which the savings banks could mostly received in the form of mortgage bonds invest consisted originally of accumulated re- of the institution (Pfandbriefe); it was up to serves and savings deposits, which could be the borrowers to convert the mortgage bonds withdrawn only after due notice and upon pre- into cash. In order better to control the market sentation of a passbook. In 1908, when the Ger- for the mortgage bonds, the Centrallandschaft man Checking Law was passed, it became pos- fuer die Preussischen Staaten was founded in sible to draw on them by check, and since that 1873; most of the Prussian Landschaften were time the savings banks have been in a position loosely associated in this organization. The to grant credits on current account. The de- Centrallandschaft issued homogeneous mort- velopment of checking deposits also led to the gage bonds against the mortgage loans granted establishment of the Girozentralen-also public by the individual Landschaften. Following the French pattern of the Credit numerous institutions owned, administered, Foncier (1852), in the latter half of the nine- guaranteed, or supervised by public bodies. teenth century private mortgage banks in cor- These institutions formed the "Oeffentlich- porate form were founded, devoting themselves rechtliche Kreditwesen", a highly complicated originally to the granting of agricultural "system", or - better - conglomeration, the mortgages, but later becoming mainly urban component members of which differed widely mortgage institutions. In contrast to the Land- in their legal structure and in their business schaften, these institutions were guided by the activities. Aside from the Reichsbank, the profit motive, and their loans were not limited Preussisclie Zentralgenossenschaftskasse, the to any special group of borrowers. Landschaften, and the savings banks, there The first mortgage banks in corporate form were before the First World War Staatsbanken were founded in the early 'sixties and 'seven- (bank of the States) and Landesbanken (banks ties; among them the Preussische Central- of the Prussian provinces). Bodenkredit, A. G. (1870-later Deutsche Cen- The public institutions in general-besides tral-Bodenkredit, A. G.) was the most out- administering public funds-largely devoted standing. The movement gained impetus and themselves to the financing of public bodies (at uniformity through the Reichshypotheken- long- and short-term) and to agricultural and bankgesetz of July 13, 1899, which definitely urban mortgage credit. They have not typically established the Hypothekenaktienbank as a engaged in commercial credit operations. This highly specialized institution with the primary statement does not refer, however, to the function of granting first mortgage loans. Only Reichsbank and the Preussische Zentralgenos- those mortgage banks which were already en- senschaftskasse, nor even to some of the larger gaged in commercial banking were allowed to Staatsbanken, such as the Preussische Staats- retain this line of business. This explains the bank, the Bayerische Staatsbank, and-after survival of a few "mixed" banks (Gemischte their foundation in the early 'twenties-the Hypothekenbanken), such as the Bayerische Saechsische and the Thueringische Staatsbank. Hypotheken-und Wechselbank and the Bayer- The most important bank in the latter category ische Vereinsbank, both in ; this type of has always been the Preussische Staatsbank, institution remained characteristic of Bavaria. founded in 1772 and generally known as the As in the case of the Landschaften, the in- "Seehandlung" (because originally founded to corporated mortgage banks granted first mort- foster foreign trade and navigation); it used gages, which formed the backing (Deckungs- to play an important part on the Berlin money masse) of an equivalent amount of mortgage market as a lender of short-term funds. bonds (Pfandbriefe), the main liability of the banks. As a sideline, the banks granted loans 2. First World War and Inflation Period to municipalities financed through the issue of municipal bonds (Kommunalanleihen). The sale (1914-1923) of the mortgage and municipal bonds to inves- War, tors was generally carried out With the outbreak of the First World through the practically all the belligerent countries aban- commercial banks, particularly through the Germany was no ex- numerous branches of the large Berlin banks doned the gold standard. ception. From the early days of the First World with which the mortgage banks maintained Rentenmark friendly relations. The trend toward War until the introduction of the combina- in November 1923, she was on an increasingly tions so characteristic of the commercial Aktien- The deci- banken even before the First World War was inflated irredeemable paper standard. sive initial step was taken when by legislation not typical of the incorporated mortgage banks was relieved until the days of the German inflation. of August 4, 1914, the Reichsbank of its obligation to redeem its notes in gold. Role of public institutions War finance From the preceding discussion it will be evi- dent that the role of governmental bodies was With the outbreak of hostilities, the Reichs- much more important in the German banking bank was made an important link in financing system than in that of other countries. "Gov- the war. Rather than relying primarily on ernment in business" is traditionally less taxes, the Government followed the policy of dreaded in Germany than elsewhere. In earlier issuing long-term Kriegsanleihen (Reich war times the princes, and later the various States loans). However, since the process of selling and their political subdivisions, were the pa- bond issues is slow and periodic, whereas the trons of economic life and were looked to for tremendous war expenditures had to be met assistance when private credit was impaired continuously, it was decided to finance the cur- (as after the German inflation). In Germany rent war expenditures through the sale of state socialism is deeply entrenched. short-term treasury bills (Reichsschatzanweis- Before the First World War, although the ungen) to the Reichsbank and to other banks; Reich itself had not yet entered the banking at intervals, the treasury bills were to be field except through the Reichsbank, there were funded into Kriegsanleihen. While the Reichsbank was authorized to buy provided by the Treaty-but also all pensions securities of the Reich they were not admitted and other compensation to the Allied soldiers as note cover, so that the amount that might and sailors and their beneficiaries. The figure be purchased was rather limited. Consequently, of M. 132 billion corresponded to more than a drastic change in the Reichsbank law was three times the amount of the total national necessary: through legislation of August 4, income of the larger and wealthier prewar Ger- 1914, the Schatzanweisungen (along with com- many (M. 42 billion in 1913). The figure was mercial bills) were admitted as cover for the arrived at with scant regard for Germany's note issue. This step, together with the develop- ability to produce the foreign exchange neces- ment of the finances of the Reich, proved dan- sary for the conversion of the Mark payments gerous during the war and fatal in the postwar into the of the creditor nations. This period. created the much-debated "transfer problem" The credit institutions, particularly the sav- which plagued all discussions of reparations ings banks, not only bought substantial amounts until they were finally suspended in 1932. of Kriegsanleihen, but, even more important, How much Germany really paid in the period took an active part in securing a wide distribu- from 1919 to 1923 as a whole is difficult to tion of the issues among the public. Altogether, determine. Allied estimates range between M. 98.4 billion of war loans were issued during M. 14 and 26 billion; German claims run up to the war, with more than 39 million individual M. 43 billion, including many items not acknowl- subscriptions. The first war loans were a com- edged by the Allies as reparations. Whatever plete success. As the war drew out, however, the actual payments may have been, it is safe the proceeds from the loans proved insufficient to say that they laid a heavy burden upon the to redeem the treasury bills,, which thus piled finances of the new German regime. up with the credit institutions, particularly the Reichsbank. The amount of commercial and Inflation treasury bills held by the Reichsbank at the The root cause of the German inflation was end of 1918 amounted to M. 27.4 billion against the failure of the Government to meet its ex- 1M. 3.9 billion at the end of 1914. The Reichs- penditures by taxation and its inability to cover bank note issue increased correspondingly. the resulting deficit by borrowing from sources Total monetary circulation, which in 1914 other than the Reichsbank. When, following an amounted to about 6 billion Mark, rose by Nov- initial period of financing the Reich's payments ember 7, 1918, to some M. 28 billion so that by the creation of new money, internal prices the German currency was already greatly in- began to rise and the exchange value of the flated at the end of the war. Mark began to fall, the inflationary movement In this respect, Germany was no worse off became cumulative, being spurred on by specu- than other belligerents such as France. The lative forces operating on domestic prices and German situation proved to be basically differ- in the foreign exchange market. ent, however, because even after the Armistice, The inflation commenced in a period of social the expenditures of the Reich continued to be unrest, political disorder, and general lack of tremendous. Germany was a defeated nation confidence in the future, stimulating a flight under obligation to make large reparation pay- of capital into goods and into foreign exchange. ments. Since the Reich had lost its credit stand- As the internal and external value of the ing at home and abroad and was therefore Reichsmark fell, government expenditures, in- barred from long-term borrowings and since cluding reparation payments, required ever-in- the new republican governments were either creasing Mark sums; the higher Mark expendi- unable or unwilling to levy taxes high enough ture called for increased borrowings from the to pay for the increased expenditures, the sell- Reichsbank and the injection of further new ing of Schatzanweisungen to the Reichsbank money into the system; this inflationary ex- became increasingly and at last exclusively the pansion of the note circulation again forced up means of deficit financing. This process led to domestic prices and pressed down the exchange an unprecedented currency inflation. value of the Mark. The process had many rami- fications, each of the factors being mutually Reparations interdependent upon the others. But generally From 1920 to 1923-24, economic and financial speaking, it was this vicious circle, inflamed by developments in Germany were deeply affected the prevailing speculative fever, that brought by the efforts of the Allies to enforce the col- about the "runaway" German inflation. The lection of the reparation payments which were expansion of the note circulation took on a imposed by the Treaty of Versailles. The gigantic form in the last stages when France amount to be paid was not fixed in the Treaty occupied the Ruhr district in January 1923 and itself but was to be determined through a Repa- the German Government undertook to support rations Commission by May 21, 1921. On this the passive resistance of that area by paying date, the Commission announced that the the idle workers and by placing huge credits at amount to be paid was M. 132 billion, a sum the disposal of the Ruhr industrialists. In this which covered not only the war damages-as culminating phase, it became apparent that the inflation of the currency was a deliberate policy would have come to a complete standstill. Thus, of the German Government aimed at frustrat- a shrinking gold value of the currency was ing the attempts of the Allied Powers to collect combined with an increased velocity of circu- reparations. lation. The magnitude of this disaster is indicated It is an interesting question how any sort of by the following development: the Dollar, in economic life could be maintained for several prewar days equivalent to M. 4.20 (mint par), years under such conditions and how the Ger- ranged from M. 7 to M. 50 in 1919, and from man economy could even develop that illusory M. 169 to M. 9,150 in 1922. At the end of Janu- business activity which characterized German ary 1923, it was quoted at M. 50,000; at the inflation. The answer is that under inflationary end of July, at M. 1 million; at the beginning of conditions not all factors are rising at the same October, at M. 1 billion (9 zeros) ; at the middle rate: thus, wholesale prices rose faster than of November, at M. 1 trillion (12 zeros); and costs, particularly wages. So it was possible to finally, on November 20, 1923, the time when produce at a profit-at the expense, of course, the new Reichsmark currency was introduced, of German labor. As foreign exchange rates at M. 4.2 trillion. This was exactly one trillionth rose faster than domestic prices, exports and of the pre-war value of the Mark, expressed in foreign travel in Germany were stimulated, terms of the dollar. The German note circula- while German speculators profited by buying tion, which at the end of 1918 was M. 22.2 bil- foreign exchange for subsequent use in pur- lion, in June 1922 stood at 169 billion; in March chasing goods. As share prices on the stock 1923, at 5.5 trillion; and in November 1923, at exchange did not all rise in the same proportion, 400 quintillion (18 zeros). it was profitable to switch to the still "under- Wholesale prices showed the following de- valued" ones from those which already had velopment (1913 = 1): reached a higher level. Jan. 1919 ...... 2.6 The discount rate of the Reichsbank was held Jan. 1920 ...... 12.6 stable at 5 per cent from December 1914 to Jan. 192.1 ...... 14.4 July 1922, when inflation had already proceeded Jan. 1922 ...... 36.7 very far. The rate was then raised at frequent July 1922 ...... 100.6 Nov. 1922 ...... 1,154.0 intervals and by large gradations until it Dec. 1922 ...... 1,475.0 reached the high point of 90 per cent in Septem- Jan. 1923 ...... 2,785 ber 1923, when also for the first time a rate June 1923 ...... 19,385 for Mark loans in terms of gold was introduced Aug. 1923 ...... 944,041 Sept. 1923 ...... 23,948,898 (10 per cent). The rate charged by credit in- Oct. 1923 ...... 7,094,800,000 stitutions for loans against first-class securities Nov. 1923 ...... 725,700,000,000 ranged between 51/2 and 61/2 per cent as late Dec. 1923 ...... 1,261,600,000,000 as August 1922, and between 9 and 10 per cent The purchasing power of the Mark sank in January 1923; it rose to 15 per cent at the gradually, as one writer put it, to "something beginning of February, receding to about 10 more ridiculous than zero". As a result, re- per cent at the end of that month, when there ceivers of wages and salaries spent their in- was a lull in the depreciation of the currency. comes as fast as possible, every delay causing In the second quarter of 1923, it fluctuated be- additional losses. Furthermore, a scramble de- tween 12 and 18 per cent. There was a rapid veloped for durable goods, real property, and rise from this point on until a climax was equity securities, because savings in the form reached in the second week of November, when of money claims (deposits or interest-bearing a rate of 40 per cent per diem was charged. bonds) were condemned to depreciation. It be- All in all, the interest rates of credit institu- came foolish to save or to invest conservatively, tions, and even more the discount rate of the and wise to spend and to speculate-all this Reichsbank, were slow to move and did not contributed to an unprecedented increase in the keep up with currency depreciation. The prin- velocity of the monetary circulation. cipal liabilities of the banks (their deposits) As the external value of the Mark fell, there were also stated in money terms so that their was a strong tendency for its internal value to concern was not so much to preserve the real follow suit. Businessmen automatically adjusted value of their assets as the real value of their their prices to the declining foreign exchange earnings. The gross earnings of a credit insti- rate and tried to anticipate as much as possible tution consist, of course, in the spread between its further imminent decline. Prices, in other interest credited to depositors and charged to words, became increasingly dollar prices, dis- debtors. During the inflation the banks in- guised as Mark prices. The result was that it creased the rates of interest payable to depos- became physically impossible for the Reichs- itors, but not sufficiently to offset the losses of bank to increase the volume of notes fast depositors on the depreciation of the currency; enough to carry on the turnover of goods, the rates charged to debtors were increased even paper value of which was rising continually. If more rapidly, but still not enough to compen- the indicated increase in the velocity of circu- sate for the depreciation. Therefore, the banks lation of money had not taken place, business enjoyed a widening spread on their credit operations and made large paper profits. This bonds and of the debtor in paying amortization procedure benefited not only the banks but also and interest charges. These tendencies are of their borrowers, who gained from the fact that interest as the forerunners of the "Renten- the amount which they received was always mark", which brought inflation-nightmare of worth more in real terms than the amount German monetary history-to an end. which they repaid plus accrued interest. Thus borrowing became the greatest "racket" of the Industrial combinations inflation profiteers ("Inflations-Gewinnler"), In contrast to monetary claims, real wealth and loans were obtained from credit institutions embodied in durable goods, real property, and at the expense of the ultimate lenders-the equity securities, rose continuously in price saving public. At the end of the inflation, it is during the inflation and kept pace with the true, both credit institutions and many bor- depreciation of the Mark. So, in order to avoid rowers showed substantial capital losses. This losses through inflation, and even to prosper in was due mainly to the fact that neither group adversity, the principle was followed "Own and was able to anticipate the actual rate of future owe as much as you can". The smartest thing depreciation, and that it was not always pos- of course, was to owe in order to own: it was sible to store away inflation profits in assets good business practice to buy a house highly which preserved a real value even after the encumbered with mortgage debts, to pay off currency became virtually worthless. the mortgages with inflated money, and so to own the house debt free. On the same principle, Fate of savings gigantic combinations were built up in industry All monetary claims, such as savings deposits through the acquisition of shares financed by and bonds, melted away, because the principle bank loans which were then paid off in depre- "Mark= Mark" was maintained and the Reichs- ciated money. bank notes remained legal tender. Thus, it was The dominant personality in the combination perfectly legal to pay off a creditor from whom movement-a notable figure even in pre-war one had borrowed, say in 1913, with the de- days-was Hugo Stinnes, who in his largest preciated paper money of 1923. The main losers concern, the Siemens-Schuckert-Rhein-Elbe- in the inflationary process were, therefore, the Union, gathered together an enormous empire thrifty middle classes who had conservatively of interests in shipping, mining, iron and steel, stored their inherited wealth or their accumu- and electrical enterprises. In addition, the hold- lated earnings in savings deposits, bonds of the ing company, Hugo Stinnes, G.m.b.H., held Reich (Kriegsanleihe) or of public corporations participations in all sorts of enterprises both mortgage bonds, insurance, policies, or other in Germany and abroad, and Stinnes is said at forms of money claims. After stabilization was one time to have controlled the employment of reached in 1923-24, these claims were partly 600,000 workers. The speculative genius of revalued on a moderate scale (see page 21). Stinnes found its financial counterpart in Jacob The revaluation, however, did not basically Goldschmidt, who as leader of the Darmstaedter change the expropriation of the middle class, und National Bank financed his transactions. which was to have a lasting effect on Germany's The "Danat"-bank, which had resulted from a social structure and which created complexes merger in 1922 of the Bank fuer Handel und of resentment with tremendous political impli- Industrie (Darmstaedter Bank) and the Na- cations. The disgruntled middle class, which tionalbank fuer Deutschland, was at that time had at first followed democratic lines, under the the leading D-bank, the others following more impact of the economic crisis in the late 'twen- conservative lines. ties and early 'thirties, fell an easy prey to . Mention should be made of certain Effect upon commercial banks attempts made by creditors to regain a stable In the losses and gains arising from the in- basis upon which long-term credits could be flationary process, the credit institutions them- granted. The Mark had lost its quality as a selves-as distinguished from their fortunate "standard of deferred payments"; creditors debtors and their unfortunate creditors-were began to insist that new long-term debts be in a somewhat neutral position. Both their based on "Sachwerte" (real, as contrasted with assets and liabilities, at any given moment, monetary, values). In the field of mortgage consisted predominantly of obligations ex- financing, beginning with the Roggen-Renten- pressed in fixed money terms. As a result, a bank A. G. (August 1921), a series of rye decrease in the value of the monetary unit mortgage banks were founded to issue so-called diminished the real value of both sides of the Roggen-Pfandbriefe (rye mortgage bonds) and balance sheet in equal degree and in the same to make mortgage loans on the same basis. direction. While the debtors of the bank profited Similarly, in the field of industrial financing, the bank was compensated by a corresponding bonds were issued based on gold, coal, nitrates, alleviation of its obligations to creditors. and even electricity. The current price of the These statements require qualification in so commodity concerned was made the standard far as the banks in corporate form also may for the obligations of the creditor in buying the have invested their capital stock and reserves (surplus reserves) in monetary claims of amounted to some M. 19 billion, and at the end dwindling value; in that case, their own re- of 1918, to M. 31%/ billion; by the end of 1924, sources would also suffer. The more, on the however, they were valued at only M. 608 mil- other hand, that the banks were able to invest lion gold. The fate of the credit cooperatives any of their funds in assets which appreciated was similar. The deposits of the urban credit in money terms as the currency depreciated, cooperatives decreased from M. 1.4 billion in the more they were able to weather the storms 1913 to M. 88 million in 1924. of inflation without loss of their own capital. The fate of the savings banks and credit Such depreciation-resisting assets were mainly cooperatives was shared by the mortgage banks. bank buildings and equipment, foreign exchange The proceeds of the "Pfandbriefe" (mortgage reserves, and share holdings. In this respect, bonds) sold to the public had been invested in the German commercial banks and bankers compliance with the law in long-term mort- were relatively fortunate, since they normally gages, the value of which was wiped out. The dealt in foreign exchange and held investments mortgagees, of course, took advantage of the in the shares of other corporations. During the situation and paid back the mortgages in de- inflation, the Berlin banks particularly increased preciated money. The outstanding amount of the proportionate share of their balances with mortgage bonds of the incorporated mortgage foreign correspondents, while the share of their banks had fluctuated during 1913-18 between own security holdings and "syndicate partici- M. 10 and M. 11 billion; at the end of 1923, pations" (Konsortial-Beteiligungen) also rose, there remained bonds with a gold value of only as was revealed by the balance sheets of the some M. 39 million. Since a substantial part of Berlin banks made out in terms of gold Mark the capital of the mortgage banks also had as of January 1, 1944. Nonetheless, on this latter been invested in mortgages, the institutions date the capital and reserves of the banks lost more than four-fifths of their own re- showed a substantial decrease in terms of gold serves; in 1913 their capital and reserves Mark as compared with 1913 (e.g., Deutsche amounted to M. 888 million, but in 1924 to Bank 1913, M. 312.5 million; 1924, M. 200 mil- only M. 158 million. lion). The banks were free, however, to place a With their interest income (spread) fixed by rather arbitrary valuation on assets such as long-term contracts and with rising administra- security holdings, and the losses were probably tive expenses, the mortgage banks were under considerably smaller; an indication to this effect pressure to save costs. To this end they entered is the rise in the price of bank shares in the into combinations-a movement which until the years after the stabilization. beginning of the inflation had been unknown In general, the German commercial banks in this field. So-called "Gemeinschaftsver- and bankers participated in the war and infla- traege" were concluded, which in their legal tion "prosperity" particularly through stock structure approximated pooling agreements. In market and foreign exchange transactions, both Northern and Central Germany, the Gemein- on their own and on customers' accounts. An schaftsgruppe Deutscher Hypothekenbanken indication of the "prosperity" of the commer- was formed (April 1921), its core consisting of cial banks is the increase in the number of the Preussische Central-Bodenkredit A. G. employees during the inflationary period: the (later Deutsche Central-Bodenkredit A. G.) combined employees of the Deutsche Bank and and the Deutsche Hypothekenbank Meiningen the Dresdner Bank numbered 23,098 in 1918 (later Deutsche Hypothekenbank Weimar). In and 55,814 in 1923. The private bankers, who the field of Bavarian mortgage financing, which, also specialized in foreign exchange and stock as described above, is characterized by institu- market transactions, prospered in the days of tions of the "mixed" type, two groups were inflation and gained back much of the ground formed-one, the Vereinsbank-Gruppe (March they had lost in pre-war days. Their number 1921), under the sponsorship of the Bayerische increased greatly in view of the large paper Vereinsbank; and the other in a somewhat profits offered by these types of operations. looser form, the Arbeitsgemeinschaft Siid- deutscher Hypothekenbanken, organized in Effect upon savings banks and mortgage institutions April-August 1923, under the lead of the A different picture is presented by the sav- Bayerische Hypotheken und Wechselbank. These ings banks, which, aside from their regular two groups were combined in 1940 into the Ar- extension of mortgage loans, had invested a beitsgemeinschaft Deutscher Hypotheken and rising proportion of their funds in bonds, such Gemischter Banken. The banks of the groups as the Kriegsanleihen and to a smaller extent retained their legal identity but were held to- "Kommunaldarlehen" (loans to municipalities). gether by the exchange of share holdings, by At the end of the inflation, they and their de- interlocking directorates, and by agreements positors found themselves in a sad state: their concerning the pooling of profits and the limita- savings deposits at the end of 1913 had tion of competition. 3. Period of Reorganization Following Inflation to 4.2 trillion paper Mark). By this policy, the (1923-1930) value of the Reichsbank notes was pegged to that of the Rentenbankscheine, and the stabi- The Rentenmark lization of the Reichsbank currency was thus The German inflation ended with the estab- indirectly attained. lishment of the Deutsche Rentenbank (decree The issue of Rentenmark notes covered a of October 15, 1923), and the issue of the "Ren- period of transition from November 1923 until tenmark" one month later. By the end of October 1924. The Rentenmark was a purely November the flood of paper Mark had risen to domestic currency (Binnenwaehrung) without M. 400 quintillion (18 zeros), the gold value of convertibility into currencies of other countries. which (at the rate of 4.2 trillion paper Mark Therefore it was necessary in connection with for one dollar) had declined to M. 400 million the reparation problem to reconstruct the gold. Reichsbank currency based on gold and to pro- The Deutsche Rentenbank was established vide for the liquidation of the Rentenbank with the right to issue notes, the Rentenbank- notes. With the new currency laws of August scheine, redeemable in interest-bearing "Ren- 20, 1924 (see below) the Gesetz fiber die Liqui- tenbriefe" (a sort of mortgage bond) in terms dierung des Umlaufs an Rentenbankscheinen of gold Mark, which were secured by a collective was also passed prohibiting the issue of addi- mortgage debt imposed upon German agricul- tional notes after October 11, 1924, and pro- ture and industry. Since the "Rentenbriefe" viding for their successive liquidation through could be exchanged in turn only for German the Reichsbank before October 11, 1934. By currency the backing was fictitious. In sub- October 11, 1924, the Rentenbank had issued stance, therefore, the notes were non-interest- RtM. 1,200 million in granting credits to the bearing mortgage bonds in small denominations Reich and RtM. 880 million in the form of -distant relatives of the assignats of the credits to industry. In 1930 the final date of French Revolution. liquidation was postponed to December 31, Yet, to the amazement of textbook writers 1942; finally, a decree of September 4, 1939, on money and banking and of the German suspended the liquidation and even authorized public as well, the Rentenmark (RtM) proved a reincrease of the issue. to be a complete success. The "miracle of the Rentenmark" was due primarily to the rigid Reconstruction of the Reichsbank limitation on the issuance of the new notes, After 1923-24, international relations im- although the situation was also greatly aided proved. This development was crowned in the by the psychological preparedness of the Ger- political field by the conclusion of the Locarno mans for anything that was suggested to them Treaties (signed December 1, 1924), and in the as stable in value. The Rentenbank was author- economic and financial fields by the adoption ized to grant credits to the Reich and to indus- of the Dawes Plan at the London Conference tries only up to a maximum of RtM. 1,200 mil- (July 16 to August 16, 1924). This plan deter- lion each. The loan to the Reich was of utmost mined from what specific sources the Reichs- importance because it bridged the period of mark funds for reparations were to be derived time which necessarily elapsed until taxes could and provided for the reconstruction of the Ger- again be collected in stable money. man currency and the orderly conversion of The issue of the new currency was integrated Reichsmark funds into the currencies of the with the existing facilities of the Reichsbank creditor nations. The plan was provisional, how- and its outstanding notes. Reichsbank notes ever, leaving the duration of the payments remained legal tender, whereas the Renten- undetermined. On June 30, 1930, it was super- bankscheine were made a "legally-admitted me- seded by the Young Plan, which set up a final dium of exchange" and only had to be accepted schedule of payments to run 58 years and ter- by public agencies. The Rentenmark credits minate in 1988. In 1931, the year following the were granted, and the new notes were issued, adoption of the Young Plan, the German bank- through the medium of the Reichsbank, which ing and foreign exchange crisis intervened, and, abstained from the further discounting of as a result of the Lausanne Conference, held in Treasury bills. The discounting of commercial June 1932, reparation payments were sus- bills in terms of the old Mark remained per- pended. missible and until early October 1924 the After adoption of the Dawes Plan in 1924, Reichsbank carried its accounts partly in terms the Reich passed a series of laws to put it into of Rentenmark, and partly in terms of paper force. The reconstruction of the German cur- mark. A fixed exchange rate between the rency, now Reichsmark currency, was accom- Reichsbank paper Mark and the Rentenmark plished by the Banking Law and the Mint Law, was not set by law. In practice, however, the both of August 30, 1924. The Banking Law Rentenmark became interchangeable with paper stated expressly that the Reichsbank was in- Mark at the rate of one Rentenmark to one dependent of the Reich Government. Its man- trillion paper Mark (on the basis of one dollar agement remained in the hands of the Reichs- bankdirektorium, but was to be supervised by mum requirement. To the extent that the notes a newly created General Council (Generalrat), were not covered by this reserve, they had to consisting of 7 German and 7 foreign members. be backed by commercial bills with a maturity The General Council, by a majority of 9 mem- not exceeding three months, which had to have bers, was to elect the president of the bank, a third signature-in practice that of the re- subject to the approval of the President of the discounting bank-besides the names of drawer Republic. The General Council also elected one and drawee. Treasury bills, as in pre-war days, of its foreign members to serve as Currency were excluded from the cover. Commissioner (Kommissar fuer die Notenaus- The German currency system as it developed gabe), whose- duty was to supervise the issue in practice on the basis of the new laws of of notes and the maintenance of their cover. August 30, 1924, may be characterized as a The Commissioner was one of a series of com- somewhat restricted gold bullion and foreign missioners and trustees who were to assist the exchange standard. Although the Mint Law of newly-created Agent General for Reparation August 30, 1924, provided for the coinage of Payments. The Agent General had to receive gold at the ratio of 1 kilogram of fine the German reparation payments in an account gold = RM. 2,790 (mint par), no gold was at the Reichsbank, to distribute them among coined, and the gold reserve of the country was the creditor nations, and to report to the Repa- held by the Reichsbank in the form of gold ration Commission created by the Versailles bars. The Reichsbank was compelled to buy Treaty. The transfer of the funds into foreign gold at the fixed rate of RM. 2,784 per kilo- currencies was entrusted to the newly created gram, and, according to the Banking Law, it Transfer Committee, of which the Agent was a had to redeem its notes at its option, either in member. gold coins or bars at the rate of RM. 2,790 per After adoption of the Young Plan, the Bank- kilogram of fine gold, or in foreign exchange at ing Law of August 30, 1924, was considerably not less than the par of exchange. However the modified by amendments which became effec- law provided that the obligation of the Reichs- tive on May 17, 1930, and December 1, 1930, bank to redeem its notes should only take effect respectively. These amendments ended foreign by a joint decision of the Reichsbankdirek- control, reducing the membership of the Coun- torium and the Generalrat. This decision was cil of the Reichsbank to 10, all of whom were in fact reached only on April 17, 1930, in con- to be . Similarly, the Currency Com- nection with the arrangements under the missioner was now to be a German, in the Young Plan; however, in practice the Reichs- person of the President of the Reich Court of bank bought and sold foreign exchange and Accounting (Reichsrechnungshof). The Agent became the most influential trader on the General for Reparation Payments and the foreign exchange market. Transfer Committee were abolished, and their Warned through the experiences of the war respective duties were transferred to the newly- and inflation period, the Banking Act was care- created Bank for International Settlements in fully drafted to limit the extension of credit Basel, Switzerland. 1 However, the activities of to the Reich. The Bank was authorized to grant the Bank in the field of reparations were short- it working credits (Betriebskredite) not ex- lived. As already stated, in June 1932 German ceeding RM. 100 million and to grant the Ger- reparation payments were suspended by the man Reichspost and Reichsbahn an aggregate Lausanne Conference. amount of not more than RM. 200 million. To On the basis of the new monetary laws of pave the way for open-market operations, an 1924 the Reichsbank issued the new Reichsbank amendment to the Banking Act of July 26, notes, denominated in Reichsmark instead of 1926, also authorized the Reichsbank to buy Mark. In March 1925 all Reichsbank notes is- and sell Treasury bills without admitting them sued before adoption of the new banking law as note cover and limiting the amount of Treas- were called in for exchange into new Reichs- ury bills discounted or held as collateral for mark notes at the rate of 1 billion paper lombard loans to a maximum of RM. 400 million. Mark = 1 Reichsmark. The paper Mark notes ceased to be legal tender from June 5, 1925. Deflation The new Reichsbank notes were to be backed Stabilization was followed-after a short up- by a minimum of 40 per cent in gold and in swing-by a serious crisis of deflation and de- foreign exchange, the latter not to exceed one- pression, which lasted from the fall of 1923 fourth of the total reserve; thus, the notes until about mid-summer 1926. The gold mark were to be backed by a reserve of at least 30 balance sheets which all business firms had to per cent in gold. Provisions were made to allow set up as of January 1, 1924, with inflated paper the Reichsbank a temporary relaxation of the values written down to their gold values, re- legal minimum, subject to a severe graduated vealed a tremendous shrinkage in current tax and increased discount rates; in practice, assets. Moreover, fixed assets, which had been the gold and foreign exchange reserve up to greatly expanded during the inflation period, 1930-31 was very much higher than the mini- proved in many cases to be over-extended, hope- 1 The Reichsbank was a founding member of the B. I. S. lessly out of date, and obsolete. Germany had been cut off from foreign competition for ten the Reichsmark, enforced the liquidation of years and had lost touch with technological foreign exchange reserves through their sale to developments abroad. The number of business the Reichsbank, and accelerated the weeding and banking firms had greatly expanded during out of unsound business firms. the periods of war and inflation prosperity, and the loose combines that had sprung up proved Revaluation and new debt structure weak and uneconomic. Agricultural land was To repair at least in part the havoc wrought worn out for lack of fertilizers, cattle were in the social structure of Germany by the pau- underfed-all in all, economic life was in a very perization of the middle class, some of the anaemic state. long-term debts were revalued. Beginning with Meanwhile, the Government had to levy high the Dritte Steuernotverordnung of February taxes to balance the budget as a main prere- 14, 1924, a complex pattern of legislation was quisite of a stable currency. There was no long- developed (Aufwertungsgesetzgebung) con- term capital market, short-term funds were cerning the different forms of long-term in- extremely scarce, and interest rates were very debtedness. Roughly speaking, the revaluation high. So, under the pressure of high taxes, high rate for mortgage debts ranged between 15 and interest rates, and growing foreign competi- 25 per cent, with a corresponding revaluation tion, Germany had to undergo a painful process of savings deposits of savings banks and of of industrial reorganization and readjustment mortgage bonds issued by the mortgage insti- to world economy. Businesses were thrown into tutions. Holders of bonds of the Reich (includ- bankruptcy, unemployment increased, and ing Kriegsanleihen), the States, and municipali- prices dropped. The depression reached its peak ties who had acquired the securities before in 1925-26. In July 1925, the huge inflation-born July 7, 1920, received a certificate for each Hugo Stinnes concern collapsed, and a period M. 1000 of their claims. The certificates were of severe depression followed, persisting una- to be drawn for redemption annually, begin- bated until the spring of 1926. ning in 1926 and ending in 1955 and, when In the period of reconstruction, the Reichs- drawn, netted the holder RM. 125 plus 41/2 per bank under Dr. easily assumed cent interest for the period elapsed (5 per cent leadership. The resources of the banking sys- in the case of municipal loans). Checking de- tem were depleted, but the Reichsbank with its posits, deposits on current account, and other ability to create credit as a note-issuing bank short-term claims were not revalued at all. held a strategic position. Except for institutions Notwithstanding this rather moderate debt administering public funds, it became practi- revaluation, the German inflation proved bene- cally the sole source of short-term banking ficial to the borrowing groups by relieving them credit in the starved economy. The demand for of a substantial proportion of their debts. The credit was so insistent that the market would inflation thus enhanced the credit standing of have paid fantastic interest rates, but the bank the public corporations and of such industries decided not to make the market rates the stand- as farming, having at their disposal fixed assets ard for its discount rate as in pre-war days little encumbered with debts. The way for new ("Konstatierungspolitik"). Early in April 1924, borrowings being open, the German economy it embarked on a policy of consciously under- was quick to build up a new debt structure, bidding the market rates and of rationing partly with foreign funds. German agriculture, credit. Until February 1925, it maintained a for instance, for which estimates are available, discount rate of 10 per cent (as established in after the stabilization showed an indebtedness September 1923), while market rates for call of only RM. 2.8 billion; by the end of 1930 this money averaged 87 per cent in January 1924 had grown to RM. 15 million. and still 17 per cent in August. At the end of 1924, the spread between discount rate and Rationalization and foreign loans market rates tended to narrow. Credit ration- By the middle of 1926, the German economy ing, however, continued until early 1926. There- began to show signs of recuperation; from then after the bank relied on its discount rate as a on it was characterized by a period of industrial means of control, reducing the rate gradually reorganization and modernization-a period of from 9 per cent in January 1926 to 5 per cent prosperity fostered by the influx of foreign in January 1927. loans which lasted until late 1929, when the The policy of credit rationing was severely beginning of the world economic crisis began criticized because a system of selective credit to cast its shadows over Central Europe and control at the discretion of the Reichsbank Germany. The industrial reconstruction took officials replaced the discount rate as a check place under the slogan of "rationalization", a on credit demand, thereby opening the door to process of reorganization aimed at lowering favoritism. Reichsbank credit granted far below costs in every possible way and thereby at the market rates amounted, of course, to a increasing aggregate productivity. With high subsidy to those who were fortunate enough to taxes, interest rates, and wages-the attitude receive it. On the other hand, the over-all re- of the Republican Government toward labor striction of credit guaranteed the stability of being sympathetic-industry was under pres- 23 sure to compensate for increased costs. German stelle fuer Auslandskredite) was set up, which, industrial leaders, therefore, studied foreign generally speaking, had a wholesome influence production methods, particularly in the United in the field of municipal loans; of the total States, and introduced them in Germany. loans in this category passed upon from 1925 Rationalization would scarcely have been pos- to 1928 about one-third were turned down. sible, however, without the assistance of foreign Nothing really effective was done, however, to capital. The Dawes Plan and the mechanisms curtail the long- and short-term borrowings by putting it into operation had guaranteed a industry or the short-term borrowings of the stable currency on a new gold basis, and with German banks. This was partly because the the debts of the German economy greatly de- Reichsbank did not have adequate legal means creased, interest rates higher than in other and partly because it lacked the courage of its countries, and an awakening belief in German convictions and was loath to hamper banking recovery, a stream of long- and short-term activities to any serious extent. Consequently loans was attracted from abroad. The interna- up to 1930, the banks and industries were al- tional Dawes loan (October 1924), which had lowed to pile up a short-term debt of RM. 13 provided the Reichsbank with RM. 800 million billion which later proved disastrous. in foreign exchange, paved the way. Long-term The Reichsbank also opposed foreign loans borrowers included not only German industrial in general because they gave a false impression enterprises and agriculture, but also States, of Germany's ability to produce the foreign municipalities, public utility corporations, mort- exchange for reparation payments. These pay- gage banks, and even churches. Short-term ments under the Dawes and Young plans, from borrowers were mainly commercial banks and September 1924 up to the Hoover Moratorium bankers. Up to the end of 1930-i.e., before in July 1931, amounted altogether to RM. 10.8 substantial withdrawals of short-term credits billion. Over this same period, the net balance set in-Germany had accumulated a foreign of trade and services was unfavorable. So, repa- indebtedness equivalent to some RM. 25 billion ration payments, the excess of imports over by issuing bonds and taking up credits. Accord- exports, and interest and amortization pay- ing to estimates of the Reichsbank, this debt ments due abroad were settled with the proceeds was distributed as follows: of foreign loans. Foreign Indebtedness at the End of 1980 German Commercial banks (Billion RM.) 1 A. Creditors in Foreign Short- Long- The development of commercial banks in the Countries term term Total reconstruction period was marked by a very United States ...... 4.4 5.6 10.0 rapid building up of deposits. The incorporated United Kingdom ...... 2.6 1.1 3.7 commercial banks had shown in their gold France ...... 8 .5 1.3 Mark balance sheets of January 1, 1924, total Holland ...... 2.7 1.9 4.6 Switzerland ...... 2.3 1.1 3.4 deposits of RM. 2.1 billion, which by the end Other countries ...... 2.0 .6 2.6 of 1929 had increased to RM. 14.4 billion. The rapid rise of the deposits of the commercial Total ...... 14.8 10.8 25.6 banks arose less from the accumulation of sav- B. Debtors in Germany ings by the public than from an expansion of Reich ...... 5 2.6 3.1 bank credit by advances and discounting bills. States ...... 3 .i5 .8 due in part to Municipalities ...... 3 .7 1.0 The rise in deposits was also Banks ...... 7.3 1.6 8.9 increasing foreign borrowings. The credits re- Industries ...... some 5.7 4.9 10.6 ceived by German banks consisted of (a) short- Others ...... some .4-.9 .5 .9-1.4 term loans in foreign currencies, mostly run- with frequent pro- ...... 14.5-15.0 10.8 25.3-25.8 ning for 1 to 3 months, but Total longations ("Barkredite"), and (b) acceptance The Reichsbank was greatly concerned about credits (Rembours-or Tratten-Kredite), under the development of this indebtedness. It fore- which the customers .of the German bank (at saw a rising demand for foreign exchange to the latter's discretion) were allowed to draw in meet interest and amortization payments, and foreign currency on a foreign bank up to a therefore inclined to favor only loans the pro- specified amount, generally for 3 months, with ceeds of which would be invested in productive frequent renewals. Under this form of accept- enterprises and-in the ideal case-in under- ance credit, the German bank was liable to pay takings which would either decrease the de- the foreign bank in foreign currency at ma- mand for foreign exchange or increase its turity of the draft, whereas the customer of supply. At the instigation of the Reichsbank, an the German bank was liable only to the German Advisory Office for Foreign Loans (Beratungs- bank. The acceptances were discounted at low rates in the foreign money markets, and the 1 Gross figures, disregarding gold and foreign exchange reserves into of the Reichsbank and foreign exchange reserves of the commer- foreign exchange proceeds were converted cial banks. To these amounts should be added foreign investments Reichsmark, often by sale to the Reichsbank, of RM. 6.8 billion in domestic bond issues, in the shares of German enterprises, and in real estate-which brought the total German and finally served German industry and trade. indebtedness to foreigners to more than RM. 32 billion at the sheets of end of 1930. These credits, which in the balance 24 the German banks appeared under "Seitens der Growth of public banking Kundschaft bei Dritten benutzte Kredite", In the post-stabilization period, the German would have proved less dangerous if they had public banking system took on even greater been used for specific export and import trans- importance. The elder institutions, such as the actions; quite often, however, they were al- Preussische and Bayerische Staatsbank, gained lowed to cover the general export and import in relative strength, and a series of new public trade of the customer, and even worse, served institutions was created for special purposes. to provide working capital for purely domestic A few were organized as ordinary corporations; projects. As a result of the "mixed" character but since their capital stock was directly or of the German banks, the "Barkredite", as well indirectly owned by a public corporation or by as the acceptance credits with their frequent institutions vested with a public interest (such renewals, tended to "freeze" and to be con- as the Reichsbank), they became a part of the sidered investment credits, i.e., as a constant public banking system. source of industrial working capital-a condi- tion which later proved fatal. The growth in public banking was due first The reorganization in industry was paral- of all to the great increase in funds lodged with leled among the big banks, which underwent the public institutions. In the years following combinations on an unprecedented scale. Their the stabilization-characterized by a strong object was to cut costs (personnel) and to de- credit demand and an extreme shortage of crease the investment in fixed assets (build- private banking resources-public funds, in- ings) in order to make up for losses incurred cluding social security funds, became, aside during the inflation and early post-stabilization from the Reichsbank, the most important source periods. In 1928, the Commerz- und Privat-Bank of money market credits. The Reichsbank con- (itself already a merger in 1920 of the Com- tinually endeavored to centralize these funds, merz- und Disconto-Bank and the Mittel- and in 1927 a working agreement was reached, deutsche Privatbank) absorbed the Mittel- providing for their investment in accordance deutsche Creditbank, retaining the name of with Reichsbank policies. Commerz- und Privat-Bank, which in 1940 was Secondly, public institutions owned or guar- changed to Commerz-Bank. In 1929, the anteed by public corporations found it easier Deutsche Bank merged with the Disconto- to secure long-term foreign loans than did Gesellschaft, including in the merger the A. private institutions; this not only strengthened Schaffhausensche Bankverein A. G.; the Nord- those already in existence, such as the Landes- deutsche Bank, ; the Rheinische Cred- banken and public mortgage banks, but also itbank; and the Sueddeutsche Disconto-Gesell- encouraged the establishment of new institu- schaft A. G., the latter two in Mannheim. The tions, such as the Deutsche Landesbanken-Zen- combined institution, known after the merger trale (1923), the Deutsche Bau- und Bodenbank as the Deutsche Bank und Disconto-Gesellschaft (1923), and above all the Deutsche Renten- ("D-D-Bank"), later decided to call itself simply bank-Kreditanstalt (1925). the "Deutsche Bank" because of the respect Finally, the Republican Governments were which the name commanded at home and sympathetic toward State influence in industry abroad. and banking, which already had gained strength through the "Kriegswirtschaft" of the First Savings and mortgage banks World War. Since some public institutions In the post-stabilization years, the mortgage (such as the Reichsbank) were restricted by banks and the savings banks staged a remark- legal requirements, and since private institu- able recovery, due to the reviving thrift of the tions shrank from the risks involved, the Reich German middle classes, which were under pres- called on newly-organized institutions to carry sure to make up rapidly for the losses incurred. out special tasks (Sonderaufgaben) in line with The savings deposits of the German savings the economic policies of the Government. banks, which had amounted to only RM. 608 Prominent among the newly-established pub- million at the end of 1924, rose to RM. 10.8 bil- lic institutions were the following, all of which lion at the end of 1930 (including increases are still operating: from revaluation). The total circulation of (1) Deutsche Golddiskontbank A. G., Berlin, mortgage and municipal bonds (Kommunalan- established as a subsidiary of the Reichsbank leihen) developed in this period as follows: by law of March 19, 1924, to issue notes in End of 1924 End of 1930 terms of Sterling, although this program was (Million RM.) shelved with the reconstruction of the Reichs- Revaluation bonds ...... 3,102.6 2,380.8 used to expand the "Sachwert" bonds ...... 352.6 96.2 bank. It was subsequently Reichsmark bonds ...... 341.0 19,646.6 scope of activities of the Reichsbank. Berlin (see ...... 3,796.2 112,123.6 (2) Deutsche Rentenbank, Total above). 1 Of this amount, 1,229.6 placed abroad. Particularly conspicuous is the increase in the circulation of (3) DeutscheRentenbank-Kreditanstalt, Ber- new issues in terms of Reichsmark (or gold Mark), which at the take over the agricul- end of 1930 was nearly thirty times as high as at the end of 1924. lin, founded in 1925 to tural credits granted by the Deutsche Renten- Weaknesses of period bank and to transform them into long-term In the years 1923-24 through 1930, Germany mortgage loans. The bank became the central was closely linked to the world economy. The bank for agricultural credit. earlier years of depression and deflation fol- (4) Preussische Landesrentenbank, Berlin, lowing the stabilization gave way to a period of founded in 1923 as a semi-governmental insti- reconstruction and expansion, largely fostered tution of the Prussian State and changed in by the continuous influx of foreign capital. 1939 into an institution of the Reich under Germany's economic life had adjusted itself to the name Deutsche Landesrentenbank, was en- this stimulus, and the first signs of a slowing trusted with financing rural settlement through down in economic activity were observed in the issue of mortgage bonds. 1929, when the influx of new funds began to slacken, particularly because brokers' loans in (5) Reichs-Kredit-GesellschaftA. G., Berlin, market commanded and wholly owned by the Reich the New York money founded in 1924 rates. Indeed funds were temporarily an intermediate holding company, was higher through withdrawn during the Young Plan crisis. In devised to finance the industrial participations dwindled to half quickly into a "Ber- 1930, the inflow of new capital of the Reich and developed a billion Reichsmark, as against some 4 billion lin Grossbank." Reichsmark in 1928; the first heavy with- (6) Deutsche Verkehrs-Kredit-Bank A. G., drawals of short-term capital took place after Berlin, founded in 1923 as the bank of the the general Reichstag elections in September , became an important 1930 in which the National-Socialist party made lender on the money market. remarkable gains. The further catastrophic withdrawals in 1931 (7) Bank fuer Deutsche. Industrieobliga- on Germany's currency and Industriebank, with their effects tionen, Berlin, later Deutsche banking system will be discussed in the follow- founded in 1924 to act as trustee for the rev- These developments disrupted Ger- under the Dawes ing section. enues collected from industry many's banking system, threw Germany off the Plan. After the adoption of the Young Plan, standard, and led to a comprehensive sys- tasks (agricul- gold the bank was used for special of foreign exchange restrictions and con- financing). tem tural debt adjustment and industrial trols. From then on, the Germany economy (8) Deutsche Bau- und Bodenbank A. G., isolated itself more and more from the world Berlin, founded in 1923 for the purpose of fi- economy and developed an autarkic system, nancing urban settlements for the lower income both economic and financial, which finally cul- groups. minated in Hitler's war economy. PART II

Totalitarian banking originated in the dark days of the 1931 crisis, when the government had to intervene drastically to preserve the exchange value of the currency and the solvency of credit institutions. The emergency financial measures of the pre-Hitler regimes were continued and extended by the Nazis, and developed into instruments for the deliberate exploitation of domestic resources and of foreign countries. In particular the vast expen- ditures of the Nazi regime, first to stimulate employment but then to rearm the Reich for the next war, were financed in devious ways through credit institutions. As the inflationary pressure of these expenditures grew, in- creasingly stringent controls were established over the flow of funds in the economic system, and when the war broke out the monetary and credit structure was already thoroughly mobilized. German war finance has been especially characterized by reliance upon borrowing from credit institutions. Direct controls have prevented the public from spending much of the income generated by war expenditures, but the government-instead of seeking to borrow these excess funds direct-has been content to see them pile up in the form of currency and bank deposits and has placed its loans largely with the institutions issuing the currency and holding the deposits. The result has been, on the one hand, a vast expansion of the money supply and, on the other, heavy com- mitments in Reich paper by all credit institutions. The Reich has also borrowed large sums from institutions in which blocked funds have accumulated for the benefit of foreigners.

PART II GROWTH OF TOTALITARIAN BANKING

I. The Pre-war Period of dollars of its gold and foreign exchange The period of international stability which reserves on the world markets. As a stop-gap followed the reconstruction of currencies in the the Reichsbank and Deutsche Golddiskontbank 'twenties ended abruptly in the spring of 1931. contracted foreign loans totaling $150 million From then on the countries of the world em- (June 25 and July 7); but this amount was barked progressively on more or less intensive trifling in relation to the great international policies of monetary and economic nationalism, run on Germany. Attemps to restore interna- following their self-interest only and with little tional confidence culminated in President or no regard for the interests of other coun- Hoover's proposal for a one-year moratorium tries. The crisis developed originally in Austria, on reparations and Inter-Allied debts (June spread to Germany (both in the spring of 1931), 30). The adoption of the plan was delayed until jumped to the United Kingdom (September July 6 but in any case the situation had already 1931), to affect in the end practically all coun- become irretrievable. The international run had tries. Even those-the United States, France, developed into an internal run and the banks the Netherlands, and Switzerland-which held were under great stress. The huge withdrawal out somewhat longer were finally involved (the of foreign deposits had greatly decreased the United States in 1933-34, the others in 1936) liquidity of the banks and the Reichsbank re- and by the end of 1936 there was scarcely a sorted again to a policy of credit rationing. The country in the world that was on a free gold crisis reached its peak with the failure of the standard. In one way or another the gold stand- largest German textile concern, the "Nord- ard had been restricted or completely aban- wolle", in which the Darmstaedter and National doned, foreign exchange restrictions had been bank was heavily involved. There was a run on introduced, payments on reparations and Inter- the bank, and it closed on July 13, 1931. In Allied debts had been suspended, international spite of a Government guarantee of its deposits bond issues were in default and standstill agree- its suspension was immediately followed by a ments on short-term debts and bilateral clearing run on German banks in general. The same day agreements for international transactions were the stock exchanges were closed, and by an in operation. In many countries one of the out- emergency decree all the banks of the country, standing features of this period was the trans- with the exception of the Reichsbank and a few fer of control over gold and foreign exchange others, were ordered to suspend cash payments policy from central banks to government agen- and interbank clearings on July 14 and 15, cies such as exchange stabilization funds, which were declared bank holidays. During the foreign exchange boards, etc. ensuing breathing spell, measures were taken In many of these developments Austria and which quieted depositors and finally allowed Germany had taken the lead. On May 11, 1931, the resumption of normal domestic transactions. came the shocking revelation that the Oester- In this crucial period the first steps taken reichische Creditanstalt fir Handel und Ge- led also to the system of foreign exchange con- werbe, the largest banking institution in Aus- trols which finally completely replaced the gold tria, had applied for assistance to the Austrian standard as it had been established in 1924. Government and to the Austrian National An emergency decree of July 15 concentrated Bank; the closing of its accounts for 1930 had all foreign exchange transactions and payments revealed losses equal to the entire capital of abroad in the hands of the Reichsbank or insti- the bank. Although arrangements were quickly tutions designated by it as agents (so-called made for the reorganization, the political ten- "Devisenbanken") and another decree of July sion and the financial crisis were an alarm sig- 18 initiated the concentration of all the foreign nal to all who had short-term loans in Europe, exchange reserves of the country in the Reichs- particularly in Germany. In the first seven bank. These provisional decrees were replaced months of 1931 withdrawals of short-term on August 1, 1931, by regulations of a more credits and the flight of domestic capital from permanent nature which have been continually Germany amounted to RM. 3.5 billion. Deter- expanded and "refined" into the present com- mined to prevent depreciation of the Reichs- prehensive system of foreign exchange legisla- mark, the Reichsbank sold hundreds of millions tion (Devisengesetzgebung). These developments were the starting point curred before the crisis of July 1931 to a newly- for great structural changes in the German created agency under supervision of the Reichs- money and banking system. These changes are bank, the Konversionskasse fur Auslandsschul- reviewed in the following sections for the period den. The law did not refer to debts for which up to the outbreak of war. standstill agreements had been concluded nor to the Dawes and Young loans, for which spe- Fate of Germany's foreign indebtedness cial arrangements were made, but to all other Among all the problems of the period, the outstanding medium- and long-term obligations international debt problem-public and private to foreigners. It was left to the Reichsbank to -was of outstanding importance, and from decide when transfers into foreign currencies Bruening (March 1930 till May 1932) to Hitler should be made from the funds accumulating with the Konversionskasse. Some of the credit- (since January 1933) the German governments, impose either by agreement or by unilateral action, or countries promptly threatened to sought to "consolidate" Germany's interna- compulsory clearings and thereby obtained a position. compromise. Temporarily, 75 per cent of the tional interest charges were transferred, a compli- The Hoover moratorium, which was signed was paid in on July 6, 1931, suspended German reparation cated procedure by which a part von foreign exchange and the rest in so-called payments for one year. In July 1932, the "script" which the Deutsche Golddiskontbank Papen regime then being in power, the Lau- of creditor countries agreed subsequently repurchased at a substantial dis- sanne conference count. After July 1, 1934, a complete transfer on abrogation of the Young Plan and cancella- interest payments tion of all future payments by Germany on moratorium was in force; billion were "met" by the issue of funding bonds, and reparation account in return for three took place. 1 RM. in 5 per cent German Government bonds no more foreign exchange transfers to be deposited with the Bank for International Settlements. The ratification of the agreement Exchange control and clearing agreements for was made contingent on a satisfactory settle- international transactions ment of the Inter-Allied debt problem. Since Under the pressure of foreign credit with- such a settlement could not be reached, the drawals, German foreign exchange reserves had Lausanne treaty remained unratified and the become depleted, and in July 1931, as already "temporary" postponement granted to Ger- mentioned, first steps toward foreign exchange many pending ratification is still technically in control had been taken. In the following years effect. the situation became aggravated because Ger- The problem of short-term indebtedness was many encountered not only rising tariff bar- met by concluding "standstill agreements," riers but also the competition of countries with with foreign creditors. The first standstill devalued currencies. The Bruening regime had agreement was concluded between foreign not wished to devalue the Reichsmark; it felt banking creditors and the German bank and in- itself bound to the international agreements dustrial debtors, with the collaboration of the on which the German currency was based, and Reichsbank and the Deutsche Golddiskontbank; at great sacrifice it had followed a deflationary it went into force on September 17, 1931, for policy with the object of lowering the German a period of six months. It was from then on cost and price level. It was hoped that this regularly extended under the name of "Deut- policy would produce an export surplus en- sches Kreditabkommen". The agreements pro- abling Germany to meet her international vided for extensions and repayments of the obligations; indeed in 1931, Germany had a pre-1931 credits for the reduction of interest substantial excess of exports over imports, rates, for alternative ways of reinvesting the which covered part of the capital withdrawals frozen claims within Germany, and for the in that year. The excess was exclusively due, liquidation-particularly by travel in Germa- however, to the shrinkage of imports as a re- ny-of certain balances blocked with the sult of the decrease in Germany's national in- Reichsbank as trustee for the creditors (Regis- come; exports also declined, foreign markets termark-Guthaben). For the short-term debts being affected by the onset of the world de- of the local governments (Lander und Geme- pression. Whatever merit the deflationary inden), the first standstill agreement, was con- policies may have had, they failed politically cluded in April 1932 and regularly renewed because they increased unemployment, lowered (Kreditabkommen ffir deutsche offentliche the German standard of living, made the masses Schuldner). more radical, and paved the way for more na- The problem of long- and medium-term in- tionalistic regimes-von Papen's, von Schlei- debtedness was met by Hitler's declaration, cher's, and finally the Nazis'. shortly after he came to power, of a transfer Bruening's successors, though less moved by moratorium. By law of June 9, 1933, concern- obligations, had German debtors consideration of international ing payments on foreign debts also decided not to devalue the Reichsmark of- were obliged, commencing July 1, 1933, to make payments in Reichsmark on all foreign debts in- 1 For further details, see section on Konversionskasse, p. 75. 30 ficially. The reasons were twofold: rightly or (1) By the measure discussed above sus- wrongly, the German people associated de- pending the service on Germany's foreign in- valuation with inflation, a return of which debtedness; would have threatened the position of any Gov- (2) By freezing all old or new claims of for- ernment; furthermore, as long as Germany did eigners on Germany, thus supplementing (1); not devalue, she profited from the devaluation (3) By a comprehensive system of import of the foreign currencies in which her foreign restriction; obligations had been incurred. 2 The second con- sideration gained much weight when in 1933-34 (4) By eliminating other unnecessary for- the United States, Germany's chief creditor eign expenditures-for example foreign travel. nation, devalued the dollar. As a result of (1) and (2) above, "blocked Bruening's successors, however, embarked on marks" arose. These were balances held by a policy of "pump priming" through public foreign creditors with. German banks, the spending in order to decrease unemployment. Deutsche Golddiskontbank, or the Konversions- Under the slogan "Ankurbelung der Wirt- kasse. All these balances were blocked, in order schaft" (cranking the economy), this policy was to prevent their owners from converting them continued by the Hitler regime on a vast scale, into foreign currencies through official chan- becoming nels. In most cases the owners could sell their intensified with the reintroduction balances, however, to other foreigners, of general conscription in the spring of 1935, who and with increased spending for rearmament with the permission of the German authorities, purposes (see section could use the blocked funds within Germany commencing page 39). in a limited number of ways. The balances were As a result of these expansionist policies, Ger- classified in numerous sub-groups according to many's price level went completely out of line their origin and the identity of the holders, with those of other countries. The Reichsmark and the permitted uses for the funds differed became greatly over-valued at the official rate as between each of the several types. These of exchange and Germany's exports were seri- balances were traded outside of Germany as ously handicapped. On the other hand, imports special kinds of Reichsmark exchange (Sperr- tended to increase because the expansionist mark) which soon went to a considerable dis- policies increased the purchasing power of the count from the official rate, the discount being general public, while at the same time the re- larger or smaller according to how freely the armament program demanded a supply of im- particular category of Sperrmark could be used. ported raw materials. So Germany was in a The German authorities could to a certain ex- peculiar situation: while she did not want to tent influence the rates on the various types of devalue the Reichsmark officially, she did have Sperrmark by decrees broadening or narrowing to devise a way to export a sufficient amount their respective uses. to pay for her imports. The task of increasing the available supply In this situation, Germany resorted to a sys- of foreign exchange was carried out mainly: tem of differential exchange rates which super- (1) By requisitioning all existing foreign ex- ficially concealed the depreciation of the Reichs- change reserves accumulated by German resi- mark. The official gold parity vis-a-vis free cur- dents; rencies was maintained for transactions in a (2) By requiring all foreign exchange aris- special category of Reichsmark balances, the ing out of current exports, etc., to be offered so-called "free Reichsmark". At the same time, for sale to the Reichsbank (Anbietungspf- various other categories of Reichsmark bal- licht) ; ances were established; transactions in these (3) By developing new export markets. balances between foreign residents were per- Exports were stimulated partly by granting mitted, and took place at varying discounts direct subsidies to exporters and partly by from the official rate, depending upon the origin accepting payment in German dollar bonds or of the funds and the use to which they were Sperrmark acquired by foreign importers at to be put. This scheme was soon supplemented a substantial discount. However, the former and eventually overshadowed by numerous method was expensive in that it meant selling other devices for controlling Germany's inter- German exports rather cheaply 3 while the lat- national transactions, developed largely by Dr. ter method produced no foreign exchange for Hjalmar Schacht, President of the Reichsbank. current imports but merely retired foreign in- The whole program, called the "New Plan", debtedness. put Germany's foreign trade largely on a bi- A third device proved more effective, i.e., lateral or barter basis. the development of bilateralism, commonly The measures instituted by Schacht aimed called barter. By adopting bilateralism as the both at restricting the demand for foreign ex- basis for its foreign trade, Germany was able change and at increasing its supply. The nega- to force smaller countries to exchange goods tive task of restricting the demand for foreign with her on terms favoring the larger and more exchange was accomplished; 8 However, no more cheaply than under a free exchange system 2 These considerations-especially the first-no doubt also in- to the extent that subsidies merely offset the artificial overvalua- fluenced Bruening. tion of the Reichsmark. ruthless partner. Germany constituted a very and the Reichswirtschaftsminister operating important market for many countries (espe- through the Ueberwachungsstellen and the cially in Latin America and Eastern Europe) Devisenstellen. The Reichsbank received a which had surpluses of basic commodities monopoly in foreign exchange transactions, which could not be sold against free currencies. which it exercised through authorized agents Germany agreed to buy from these countries among the commercial banks, the so-called only if they reciprocated by making their pur- "Devisenbanken". The Reichsbank was also en- chases in Germany. In fact, by exploitation of trusted with the carrying out of the Standstill her bargaining power, Germany was sometimes agreements and the administration of the Kon- able to drive down import prices and force up versionskasse flir Auslandsschulden. The export prices, thereby improving her "terms of Deutsche Golddiskontbank-besides its func- trade". Indeed Germany even succeeded in tions in other fields-was concerned with the forcing her weaker trade partners to grant her fostering of German exports. It handled the re- credit by accepting payment for their exports purchases of foreign dollar bonds, scrip and in Reichsmark which had to be held idle until blocked marks, which were used to foster Ger- corresponding imports from Germany were man exports. It also administered the subsidies made available. for German exports in accordance with the A description of the intricate financial de- recommendations of official bodies representing vices which were developed to implement this the various industrial groups in the "corpora- trading pattern is beyond the scope of this pa- tive" structure of the German economy. per. In some cases, they took the form of clear- The core of the system, however, was the ing and payment agreements between the Ger- Reichswirschaftsminister and his administra- man Government and foreign governments (or tive agencies, the Ueberwachungsstellen and between the respective central banks) whereby the Devisenstellen. The task of the Ueberwa- all payments between the two countries were chungsstellen (supervisory boards), each un- channeled through central accounts at an offi- der a Reichs-Beauftragte, was to license im- cial exchange rate. In other cases, foreign ex- ports. Separate boards were set up for specific porters were paid in a special type of Reichs- commodities or commodity groups, such as cot- mark balances (Aski-Mark) which they had to ton, chemicals, coffee, etc. Every importation sell to importers of German goods in the same required a permit stipulating how payment was country; the exchange rate for Aski-Mark was to be made (through clearing account, Aski- generally held fairly stable at a substantial account, foreign exchange, etc.). The boards discount from the official rate. The feature of were assisted by customs officials at the points these agreements was their bilateral aspect- of entry. The 32 regional Devisenstellen, which i.e., countries could use the proceeds of their were attached to the Landesfinanzamter under exports to Germany only to pay for German an Oberfinanzprasident (similar to our Collec- imports. Under these circumstances, a pattern tors of the Internal Revenue) were competent of exchange rates on the Reichsmark developed in all transactions which did not concern the which had little relation to the purchasing import of merchandise and for which the power parity between the Reichsmark and for- Reichsbank was not responsible (e.g., remit- eign currencies, or even to the relative value tances abroad for services, private financial of the various foreign currencies. Where Ger- transactions, etc.). many could drive a hard bargain, the Reichs- mark was assigned a high value; and where The development of the Reichsbank German influence could be resisted, she was The allocation to the Reichswirtsschaftsmi- forced to permit transactions in which the nisterium of primary responsibility for German Reichsmark was traded at a heavy discount. foreign exchange regulations considerably dim- Up to the end of 1938 Germany had concluded inished the authority of the Reichsbank. With clearing and payment agreements with forty the gold and foreign exchange reserves of the countries, so that German foreign trade was Reichsbank depleted, with Germany's foreign dominated by this system. The share in Ger- trade transacted increasingly on a clearing many's import trade of countries with clear- basis, and with the whole economy concentrat- ing and payment agreements (including "Aski- ing on reemployment and later on war prepara- mark" countries) rose from 50.3 per cent in tions, the character of the Reichsbank was 1932 to 77.6 per cent in 1938, while the share completely changed. It became a tool of the of such countries in her exports rose from 70 Reich in carrying out the plans of Government per cent in 1932 to 84 per cent in 1938. Thus agencies; its autonomous functions were re- more than four-fifths of German foreign trade duced to little more than the issuance of do- in 1938 was conducted on bilateral lines. mestic currency. To supervise and control the system de- The Germans were quick to rationalize the the gold scribed above a comprehensive organization change, to speak with contempt of was developed, employing thousands of officials. standard, and to pride themselves on having The agencies involved (at the end of 1938) were a currency backed by the "value-producing 1939, the Reichsbank, the Deutsche Golddiskontbank, creative energy of the German people". In 32 Hitler declaimed before the Reichstag: "We obligations traded on the stock exchange, ad- have learned, in the first place, to take full vances on collateral, etc.). Most important, the account of the most essential capital of a na- maximum amount of Treasury bills which the tion, namely of its capacity to work. All German Reichsbank might hold or on which thoughts of a gold reserve and foreign exchange it might grant advances was to be determined fade before the industry and efficiency of well by Hitler, who was also free to determine the planned national productive resources. We have maximum amount of working credits which learned that the value of a currency lies in the Reichsbank might grant to the Reich. Un- a nation's capacity to produce, that an increas- der a provision of the banking law of 1924 ing volume of production sustains a currency which was still retained, working credits to the and could possibly raise its value, whereas a Reichspost and to the Reichsbahn were limited decreasing production must, sooner or later, to an aggregate amount of RM. 200 million. lead to a compulsory devaluation." All in all, the doors were opened wide for using It will be recalled that under the Banking the Reichsbank as an instrument of war fi- Act of 1924, if the legal reserve ratio fell below nancing. 40 per cent, the Reichsbank had to pay a grad- By the terms of the law of June 15, 1939, uated tax and raise its discount rate above 5 the Bank was not obliged to hold any gold or per cent by progressive stages. When, under foreign exchange against its outstanding notes. the strain of foreign credit withdrawals, the Such assets were admitted as a note backing legal reserve fell to 35.8 per cent on July 16, along with other ordinary banking assets and, 1931, (the Reichsbank raised the discount rate according to the law, were to be held in amounts accordingly from 7 to 10 per cent (Bruening necessary to settle international balances and regime). By decree of September 19, 1932, maintain the value of the currency. Although however-with consent of the Bank for Inter- Germany is of course on anything but a gold national Settlements-the Bank was released standard, the appearance of such a standard from the provision that its discount rate had is given by the provisions of Article 14, which to exceed 5 per cent as long as the note cover- commits the Bank to buy gold bars at the age was below 40 per cent (von Papen regime). fixed price of RM. 2,784 a kilogram, and which By an amendment to the Banking Act which states that the Bank will sell gold bars from was issued on October 27, 1933 (Hitler its available holding at the price of RM. 2,790 regime), the provisions referring to the grad- per kilogram, if it feels that the use to which uated tax and discount rate were completely the gold will be put is warranted on economic abrogated. The principle of maintaining the 40 grounds. per cent reserve against notes was still retain- From the organizational point of view, the ed in the law, but it became purely theoretical Reichsbank was gradually altered from an in- because the Reichsbankdirectorium and the dependent central bank to a mere instrument central committee of the stockholders could of the Government of the Reich. The first step authorize the bank by a concurrent resolution in this direction had been taken by the amend- to let the reserve decline below the legal mini- ment to the banking law of October 27, 1933, mum. Such action was, of course, taken. At abolishing the Generalrat, the 10 members of the same time-allegedly for the purpose of which had elected the president of the Bank, open-market operations-the Reichsbank was subject to the approval of the Reichsprasident. authorized to purchase fixed interest bearing The president and the members of the manag- securities. Such securities together with all ing board (Reichsbankdirektorium) were Lombard loans were made eligible as note cover thenceforth to be appointed and dismissed by along with discounted bills. Since the securities the Fuhrer. On January 30, 1937, by public eligible for purchase by the Reichsbank con- declaration the Fihrer proclaimed the un- sisted of bonds issued or guaranteed by the limited sovereignty of the Reich over the Reich, States, municipalities, the German rail- Reichsbank and by law of February 18, 1937, ways, public credit institutions, and organiza- the autonomous status of the Reichsbank was tions controlled by the Government, there were formally abolished. It stated expressly that the no longer any practical limits to the issue of Reichsbankdirektorium was directly subordi- notes. The Reichsbank was again where it was nated to the Fiihrer. Similarly the law of June in August 1914 (see page 16). 15, 1939, provided that the president and the The final stage in this development was managing board should receive their instruc- reached by the Gesetz fiber die Deutsche tions directly from the Flihrer. At the same Reichsbank of June 15, 1939, which did away time, the law considerably strengthened the with even the letter of the already empty re- position of the Bank's president. Whereas reso- serve provisions. According to Article 21 of lutions were formerly adopted by vote, the the law which is in force today, the note cir- president now makes decisions himself after culation of the Reichsbank (now "Deutsche- consultation with the other members of the Reichbank") need be covered merely by ordi- board. Without any legal stipulation, the offices nary banking assets (commercial and Treasury of the Reichsbankprasident and that of the bills, Treasury bonds and other long-term Reichswirtschaftsminister have been vested in one person. From mid-1934 till the end of 1937 by the Reich, and the rest by large public and the two offices were held by Dr. Hjalmar private credit institutions. Only 25 per cent Schacht, and since January 20, 1939, by Dr. of the capital was paid in, but not even this Walther Funk. amount was used for operations. The capital served simply as a potential guarantee for the Development of other credit institutions acceptance and endorsement liabilities of the In the period from the banking crisis to the bank. Private credit institutions, having ex- beginning of the second World War, German hausted the commercial bills eligible for re- credit institutions, including the savings banks, discount at the Reichsbank, mobilized their became increasingly dependent upon the Reich, credits by drawing on their customers ard by particularly the Reichswirtschaftsministerium. discounting the drafts at the Akzeptbank. In There are three developments which command the case of the savings banks, the individual special attention: savings bank would draw on its Girozentrale (a) The banking crisis of 1931-32 entailed and the draft, after being endorsed by the a comprehensive reconstruction of the large Deutsche Girozentrale-Deutsche Kommunal- banks, which temporarily made the Reich and bank, would again be discounted at the Akzept- the Golddiskontbank shareholders of some of bank. In both cases the Akzeptbank would re- Germany's leading commercial banks; discount the drafts with the Reichsbank on (b) The banking crisis initiated banking the same day. The Akzeptbank thus provided supervision, which during 1934-39 was made an additional (third) signature to the draft, increasingly comprehensive, subjecting prac- as required by the Banking Act. These financ- tically all banking institutions to the super- ing methods are historically interesting be- visions of a Reichsaufsichtsamt fur das Kre- cause they became the pattern for the work ditwesen, subordinate to the Reichswirtschafts- creation and rearmament financing of the fol- ministerium; lowing years. (c) In 1934, under the influence of Italian The endorsement and acceptance liabilities ideas on the corporative state, the whole struc- of the Akzeptbank reached a peak of RM. 1,620 ture of German business, including credit in- million in the first half of 1932, of which about stitutions, was reorganized and put under the 1,200 million represented credits to public in- supervision of the Reichswirtschaftsministe- stitutions. The largest simple obligor was the rium. Deutsche Girozentrale (RM. 500 million) as a (a) Reconstruction of credit institutions. result of its activity on behalf of the savings The withdrawals of foreign credits and the do- banks. The liquid resources of the savings mestic run on the German credit institutions banks had been quickly exhausted by the run, in 1931 put the German commercial banks in and their clearing institutions (the Girozentra- a desperate position. It developed not only that len), like the Landesbank der Rheinprovinz and a very high proportion of their liabilities were the Landesbank der Provinz Westfalen, proved short-term obligations due to foreign banks, to be of little avail because they had invested against which insufficient foreign exchange re- the reserves of the savings banks largely in serves were held, but also that the funds had long-term municipal loans. been lent out or invested on a long-term basis. In addition, the large Berlin banks had in- The Akzeptbank, which was under excellent dulged in large credits to "big business," which management, rendered great services in the limited a proper diversification of risks. When, liquidity crisis and, having fulfilled its role, under the impact of the economic crisis; the went into liquidation as of May 31, 1936. debtors became insolvent these credits proved On December 5, 1931, the Diskont-Kompanie fatal (cf. the case of "Nordwolle" and many A. G. was established to relieve the Reichsbank as much as possible and to strengthen the ac- other instances). So the crisis was not only not a matter of inadequate foreign exchange re- ceptance market by the utilization of funds yet used for investment in bankers' accept- serves; it also reflected the collapse of the scale than structure in which the banks had ances. It operated on a much smaller internal the Akzeptbank. Its capital stock amounted to over-extended themselves, especially in the Golddis- investments. RM. 50 million, of which the Deutsche direction of long-term, illiquid kontbank owned more than one-half, but only The liquidity crisis was mainly met by con- paid in. In contrast to the Ak- on foreign 25 per cent was clusion of the standstill agreements zeptbank, the Diskont-Kompagnie was not obligations and increased assistance through created solely to a new institution, the thought of as an institution the Reichsbank and overcome the banking crisis. It developed on Akzeptbank A. G. Berlin, which was establish- scale and is still in existence. ed on July 28, 1931, about two weeks after the a moderate reopening of the banks. The Akzeptbank was While these emergency measures enabled the to serve as a connecting link between the credit banks to resist the immediate impact of the institutions and the Reichsbank, and to mini- liquidity crisis, many institutions were left in mize the latter's risks in extending liquidity such a weakened state that more thorough- credits. It was endowed with a capital of RM. going measures had to be taken. A program 200 million, of which about one-third was taken for strengthening the capital structure of the banks with official funds was carried out ticipations of the Reich and the Deutsche Gold- through the Deutsche Golddiskontbank, a sub- diskontbank could be placed "on the broadest sidiary of the Reichsbank. Since the Reichs- basis" among private investors. Until that date bank was not allowed to hold capital partici- the Dresdner Bank was an outright Reich in- pations other than in the Deutsche Golddiskont- stitution and its board of directors was com- bank, the latter bank increased its capital by posed largely of officials of the Reich and the selling to the Reichsbank RM 200 million Class Reichsbank. C stock and invested the proceeds in capital A similar reconstruction took place in several stock of the reconstructed banks. This program other large Berlin banks with a varying degree had deep effects on the German banking struc- of Reich and Golddiskontbank participation. ture. The concentration process among the big The Barmer Bankverein, one of the outstanding German banks was accelerated, and some of provincial banks in the highly industrialized the Berlin Grossbanken became directly de- West (Ruhr-Gebiet), which was basically sound pendent on the Reich and the Reichsbank (via but had overexpanded its regional branch sys- the Deutsche Golddiskontbank) as sharehold- tem in the inflation period, was merged into the ers. Public influence was no longer limited to Commerz- und Privat-Bank, which after the institutions specializing particularly in mort- usual reconstruction procedures had a new gage and municipal loans and to other institu- capital stock of RM. 80 million and reserves tions with special functions, but was expanded of RM. 30 million. Of the new capital stock to some of the large commercial banks with some 55 per cent was owned by the Deutsche their vast system of branches. Although by Golddiskontbank and some 15 per cent by the 1937 the publicly-held shares had again been re- Reich, so that the Commerz-und Privat-Bank, stored to private hands ("reprivatized"), these like the Dresdner Bank, became dependent on banks were under the thumb of the Reich when public support. This bank, too, was "reprivatiz- Hitler came to power early in 1933. This par- ed" in 1937. ticipation proved to be an important milestone Of the large Berlin branch banking systems, on the way to total control of the German bank- only the Deutsche Bank und Disconto Gesell- ing system which was completed in 1934 by schaft was able to keep itself relatively inde- the Reich Credit Law and the Law providing pendent of public ownership. After disclosing a new organic structure for the German econ- its hidden reserves and reducing open reserves omy (see below). and capital stock, the bank was able to restore a During the banking crisis of July 1931 the sound position, mainly by placing new shares Reich had guaranteed the deposits of the with a syndicate of sympathetic industrial firms. Danat-Bank and furthermore provided the Its new capital structure consisted of capital Dresdner Bank with additional capital by pur- stock of RM. 144 million and RM. 25.2 million chasing RM. 300 million of its preferred stock reserves, the total slightly exceeding the com- by handing over a corresponding amount of bined capital stock and reserves of the Dresdner Treasury bills to the bank. Since the Reich Bank. Of its capital stock only RM. 50 million did not want to participate in two branch or 35 per cent was temporarily held by the banking systems, competing with one another, Deutsche Golddiskontbank. By weathering the and since the credit policies of the Danat-Bank banking crisis more successfully than the had been an important factor in bringing about Dresdner Bank, it retained and even strength- the domestic crisis, it was decided to merge ened its great prestige among the big Berlin the Danat-Bank into the Dresdner Bank, in banks. The same was true of the Berliner Han- which the Reich already had a majority capital dels Gesellschaft (a bank, it will be recalled, interest through its acquisition of preferred without branches) which kept itself sound and shares. This step also provided an opportunity completely free from Government control. for the Reich to rid itself of the uncomfortable After the Barmer Bankverein had been guarantee for the deposits of the Danat-Bank. amalgamated with the Commerz-und Privat- The reconstruction of the Dresdner Bank (in- Bank, the Allgemeine Deutsche Credit Anstalt cluding the Danat-Bank) was carried out in (ADCA) remained the most outstanding pro- several steps and brought to a close on July 1, vincial bank. This bank with total assets of 1933. It was effected through a drastic writing RM. 270 million was closely allied with the down of assets on the one hand and reducing textile industry in the State of Saxony. It was capital and reserves on the other, while new also involved in the general scheme of recon- capital was supplied through the Reich and the struction, the Deutsche Golddiskontbank taking Deutsche Golddiskontbank. In 1933 after the over 70 per cent of its capital stock of RM. final reconstruction, the Dresdner Bank had a 15 million. capital stock of RM. 150 million and reserves By the end of 1932 the Reich controlled the of RM. 15 million. About 70 per cent of the Reichs-Credit-Gesellschaft, a big Berlin bank capital stock was held by the Reich, about 20 without branches, which it had completely per cent by the Deutsche Golddiskontbank, and owned since its establishment in the early the rest was in private hands. The Dresdner 'twenties, and which because of sound manage- Bank was "reprivatized" in 1937, when the par- ment did not require any reconstruction. In addition, the Reich and the Deutsche Golddis- which had to be written off or which proved kontbank controlled the Dresdner and the uncollectible for the time being. The "Tilka" Commerz-und Privat-Bank, both large branch was a "Rechtsfahiger Verein," without obliga- banking systems, and the Deutsche Golddis- tion to publish financial statements, and was kontbank controlled the ADCA, Germany's endowed by special decree of the Reich with largest regional bank. All these institutions- a guaranty fund up to RM. 30 million. The. with the exception of the Reichs-Kredit-Gesell- institution took over the "bad debts" of the schaft-were "reprivatized" in 1937. At that banks, which acquired in their stead claims time Reich influence on the banking system was against the "Tilka;" the banks were then to so firmly established that there was no need write off these claims according to a specified for capital participation to exercise control. It plan. It has been estimated that the claims meant, therefore, no sacrifice on the part of taken over reached a maximum at one time of the Nazi regime to reestablish 'private enter- RM. 100 million. At the same time as the prise' on which the Nazis were sometimes prone "Tilka" the Deutsche Finanzierungs-Institut to pride themselves. On the other hand govern- A.G., ("Finag") was established with a capital mental influence was strengthened when in stock of RM. 30 million (25 per cent paid in) 1933 the Bank der Deutschen Arbeit was taken with the participation of the Deutsche Gold- over by the German Labor Front. The bank had diskontbank, the Bank fur deutsche Industrie been founded in 1924 under the name "Bank der Obligationen, the Akzeptbank, and a syndicate Arbeiter, Angestellten und Beamten A. G.," as of 60 banks. The Finag was to take over capital an institution of the Free Labor Unions, by far interest in and loans to reconstructed enter- Germany's most powerful labor organization. prises, in exchange for its own promissory notes It had collected savings from laborers and ad- (Solawechsel) or for cash. It had the option ministered the funds of the labor unions and of returning the assets within 5 years to the their economic enterprises. In the Spring of bank that had surrendered them. In contrast 1933 the German labor unions were dissolved to the "Tilka," the "Finag" was used on a very and the Deutsche Arbeitsfront (German labor small scale. front), was established as an organization of The crisis also brought about a general re- the Nazi party, and as the only labor union in organization of the savings bank system. On Germany. The bank was taken over by the the basis of a decree of October 6, 1931, the Deutsche Arbeitsfront on May 2, 1933. The legal structure of the savings banks and the institution, which at the end of 1931 had capi- Girozentralen was greatly altered with a view tal and reserves of RM. 15.3 million and total to making the institutions more independent assets of RM. 151 million, developed rapidly from the public bodies which guaranteed their due to the large deposits of the German Labor liabilities. The guarantee provisions were re- Front, which received compulsory contribu- tained but the savings banks (formerly direct tions from all German working people. Already agencies of their municipalities) were given in- in 1939 its total assets exceed those of the dependent legal status as public corporations Reichskredit-Gesellschaft (918 against RM. 668 with separate property rights. Corresponding- million). ly the Girozentralen, which had been agencies The reconstruction of the commercial banks of regional savings banks associations with went hand in hand with a financial reconstruc- their liabilities guaranteed by the savings tion of the banks' industrial debtors which was banks and municipalities making up the mem- carried out under the leadership of a bank or bership of the associations, were given inde- a banking syndicate comprising the chief cred- pendent legal status as public corporations, itors. The assets of many industrial corpora- under supervision of the State or Prussian tions had to be written down, and as a result Province concerned. Finally the Deutsche Giro- their capital stock had to be reduced. In many zentrale-Deutsche Kommunalbank was separ- cases the banks renounced part of their claims ated from its guarantor the Deutsche Spar- or exchanged them for newly-issued capital kassen und Giro-Verband (comprising all the stock. As a result the banks had to write down regional savings banks associations) and be- their own assets (credits on current account). came a public corporation under Reich super- They became more than ever investment insti- vision. All of these changes were aimed at tutions with substantial amounts of their funds avoiding abuses which had developed in the tied up in capital participations. At first, this granting of credits by savings institutions to was a source of embarrassment; however, later the public bodies which were their guarantors. on, when the stock market revived, these capi- In fact, after the crisis the position of some tal interests proved a source of great profits Girozentralen was sufficiently weakened so which served to build up the bank's hidden that they had to be reorganized (Landesbank reserves. der Rheinprovinz-since April 1, 1935: Rhei- To facilitate the financial reorganization of nische Girozentrale und Provinzialbank-and industries, the Tilgungskasse fiir gewerbliche the Landesbank der Provinz Westfalen, Mun- Kredite, briefly "Tilka," was established at the ster). Furthermore, a simplification took place end of 1932 to take over claims of the banks by combining some of the Landesbanken (pro- vincial banks) with the Girozentralen of the velopments the Reich greatly strengthened its same region into "Gemeinschaftsbanken". influence in the whole field of cooperative The banking crisis also initiated Reich legis- credit. lation for the savings bank system which until (b) Banking supervision. Until 1931 only the then had been subject solely to State super- public banking institutions and savings banks, vision and legislation. The new laws limited, and-among the private banks-the mort- among other things, the granting of mortgage gage banks, were subject to supervision, exer- and municipal loans through the savings banks cised in part by the Reich but mostly by the and contained elaborate provisions for the States. Supervision was therefore neither liquidity reserves to be held by the savings homogeneous nor comprehensive, and was con- banks with their Girozentralen and by the cerned mainly with compliance with legal re- Girozentralen with the Deutsche Girozentrale- quirements and the orderly administration of Deutsche Kommunalbank. the institution concerned. Positive direction of the banking system-disregarding Another the indirect development-commenced in the influence of the Reichsbank--was nonexistent, late 'twenties-came to a close in the 'thirties, though later it became the outspoken making object the Preussische Zentralgenosseschafts- of banking supervision under the Hitler regime. kasse the only central credit institution for The banking crisis the urban and rural credit cooperatives and made it apparent that converting it into an institution some system of bank supervision was manda- of the Reich. tory. The Raiffeisenbank A. G,, which The first step was taken under the Bruen- considered it- ing regime when by self as the head institution for emergency decree of Sep- the cooperatives tember 19, organized in the Generalverband der Raiffeisen 1931, the offices of a Banking Board Genossenschaften, had been (Kuratorium fur das Bankgewerbe) and a liquidated in 1928 Reich Commissioner because of losses incurred in non-cooperative for Banking (Reichskom- missar fuir das Bankgewerbe) transactions. With its elimination, the Preus- were establish- sische Zentralgenossenschaftskasse which until ed. In practice, the main function of the Com- missioner was to help then had worked mainly with the members of in the reconstruction of the Reichsverband der landwirtschaftlichen the German credit institutions. After a thor- ough investigation on German Genossenschaften developed into the only cen- banking had tral credit institution in the been conducted in 1933 under the auspices of agricultural field. the Reichsbank Further progress had been made when (Dr. Schacht), the decree was in 1930 superseded by the Reichsgesetz the two cooperative organizations, fiber das Kre- the General- ditweson of May 12, 1934, briefly verband and the Reichsverband, were combined called R. K. into G., which was more specific and which put the Reichsverband der landwirtschaft- banking lichen Genossenschaften-Raiffeisen. supervision on a broader basis. The R. K. G. was amended by a decree of Septem- In 1932 the Preussische Zentralgenossen- ber 15, 1939, changing the Reich banking law schaftskasse contributed to a fund of RM. 230 in certain respects. The decree left intact the million to aid the credit cooperatives. Its con- basic provisions of the law of 1934, but made tribution was derived from a reduction of capi- changes concerning the supervisory author- tal and reserves, and a transfer of the amounts ities. set free to a reserve for cooperative aid. In Under the law of 1934 supervision was car- reducing the capital, the participations of the ried out by a Credit Supervision Board (Auf- Reich and Prussia were equalized at RM. 42.5 sichtsamt fuer das Kreditwesen) attached to million each. At the same time the institution, the Reichsbank, and a Reich Credit Commis- which until then had been an institution sioner (Reichskommissar fur das Kreditwe- of the Prussian State under the supervision sen). The president and vice-president of the and direction of the Prussian Finanzminister, Reichsbank held the corresponding offices in became an institution of the Reich under su- the. Board. The Board was to implement the pervision of the Reichsfinanzminister (Decree Act and to determine policies thereunder; the of October 21, 1932). Its name was changed Commissioner had to see to it that the law from Preussische Zentralgenossenschaftskasse and the decisions of the Board were observed. to Deutsche Zentralgenossenschaftskasse, The law of 1939 provided for a Reichsaufsicht- briefly called "Deutschlandskasse." In 1937 samt fuir das Kreditwesen, which as an agency finally, the Reich acquired the Prussian parti- of the Reich took over the functions of the cipation, leaving only small minority holdings Commissioner (who disappeared) and became to the Deutsche Rentenbank-Kreditanstalt subordinated to the Reichswirtschaftsministe- and to cooperatives. In 1939, the "Deutsch- rium. This shift in power from the Reichsbank landkasse" took over the cooperative division to the Reichswirtschaftsministerium was char- of the Dresdner Bank and thereby became the acteristic of the development of Germany's sole central credit institution for the urban financial system under the Hitler regime. credit cooperatives, which had previously been As amended in 1939, the law of 1934 is still distributed between the Deutschlandkasse and in force today. It applied to all credit institu- the Dresdner Bank. As a result of these de- tions (even savings banks and mortgage in- stitutions) except the Reichsbank, the Deut- were rejected, however, due to the advantages sche Golddiskontbank, the Deutsche Reichspost to the Government of centralized control, and (postal checking accounts), and a few institu- also to the resistance of the big Berlin banks, tions of lesser importance. Under this legis- which found a willing listener in Dr. Schacht. lation, the Reichswirtschaftsminister and the However, these tendencies regained impetus in Reichsaufsichtsamt received comprehensive 1942 when, in order to save manpower, a great powers over the credit system. All credit in- rationalization scheme was devised with the stitutions and their branches were to be licen- effect of weakening the big Berlin branch banks sed. Under certain conditions provided in the and of strengthening regional institutions. law the board might grant or withhold the (c) Corporative organization of the credit license and order a credit institution to cease institutions. A few months after the Reichs- operation. Besides the law gave the Reichs- gesetz fiber das Kreditweson of May 12, 1934 wirtschaftsminister blanket authority over all was adopted, the foundations were laid for an banking affairs, Section 30 stating that he all-inclusive functional and regional organiza- should see to it that the banks kept in line tion of German business ("Gewerbliche Wirt- with the general requirements of the national schaft"), which borrowed certain features from monetary and banking policies, and that they the Italian corporative state. These measures refrained from abuses. He was authorized to formed part of the process of "Gleichschal- issue basic rules governing the management tung" in the economic field, which in the earlier of banks and to take appropriate action when stages of the Third Reich meant the elimina- a bank got into difficulties. tion of businessmen not sympathetic with the On the basis of experience during the bank- objectives of the national-socialist movement, ing crisis of 1931, the law set standards for and in a broader sense the constant coordina- sound banking by demanding compliance with tion and supervision of all business activity. certain maximum and minimum operating On the surface the new organization was based ratios. In order to allow for flexibility the Act on the principle of leadership (Fiihrer-Prinzip) did not set the specific ratios but authorized and industrial self-administration. Actually, the the Reichswirtschaftsminister (in agreement whole structure was subordinated to the with the Reichsbank-Direktorium) to fix them Reichswirtschaftsminister, who stood on the within certain defined limits and even to allow top of the pyramid and could pass orders down different ratios for the various groups of credit to the smallest business enterprise in every institutions.4 These ratios were to govern the field. As one Nazi writer put it, it was intended relations between (a) a bank's liabilities and to create "a highly mobile and maneuverable its cash and "secondary" reserves; (b) a bank's battalion". liabilities and its capital plus corporate re- The new organization-which included credit serves; (c) a bank's capital and its loans to institutions with all other forms of business- any single borrower other than the Reich and was based on the Gesetz zur Vorbereitung des the States; (d) a bank's capital and its in- organischen Aufbaus der deutschen Wirtschaft vestments in real estate or permanent indus- of February 27, 1934 (law concerning the prep- trial participations; and (e) a bank's liabilities aration of an organic structure of the German and its holdings of equity securities other than economy), which was supplemented by decrees, permanent participations. Besides these regu- especially one of November 27, 1934. The law latory provisions, the law prescribed numerous refers to all business except agriculture and reporting obligations for credit institutions. transportation (Gewerbliche Wirtschaft), The law gave the Reich a strong influence which was grouped on functional and regional on the banking system as a whole but it should lines. On a functional basis, it was divided into not for this reason be considered as a purely six "Reichsgruppen": manufacture, trade, Nazi measure; the law was based on the grave crafts, banks (Reichsgruppe IV), insurance, experience of the banking crisis and many of and public utilities. The Reichsgruppen were its provisions are similar to those incorporated again subdivided into "Wirtschaftsgruppen" in the banking legislation of democratic coun- (in the case of manufacture into "Hauptgrup- tries. In fact, when the banking enquiry was pen"), these again into "Fachgruppen" and held in 1933, the Nazis aspired to much more these sometimes, as in the case of the crafts, radical solutions. An influential group led by into "Fachuntergruppen." Along with the func- Baron von Schroeder wanted a complete re- tional organization was developed the regional organization and decentralization of the whole organization which at first was topped by the banking system. The big Berlin branch banks, regional Wirtschaftskammern (Chambers of which received most of the blame for the bank- Commerce) in which again the various local ing crisis, were to be broken up into regional chambers were loosely organized. In the Wirt- banks, which-it was believed-would be more schaftskammern also the regional representa- susceptible to the political influence of the re- tive of the functional organization (as those gional Nazi party organizations. These ideas of banking) were to be found. By decree of April 20, 1942, the Wirtschaftskammern were 4 Most of the ratios have not yet actually been fixed by the Reichs- wirtschaftsminister. reorganized into 29 Gauwirtschaftskammern, the different economic regions or Wirtschafts- senschaften-Raiffeisen (agricultural), were gaue coinciding with the new political sub- made the two Fachgruppen of the Wirt- divisions of the Reich. The authority of the schaftsgruppe Kreditgenossenschaften. chambers was strengthened and they became exclusively responsible for carrying out within Control of interest rates and the capital market the region the economic tasks set by the Reich. The development of totalitarian banking The head-groups of the functional and re- was also characterized by increasing regimen- gional organizations were represented in a tation of the domestic money and capital central body, the "Reichswirtschaftskam- markets. Severe exchange control gave Ger- mer", through which control was exercised many a self-contained financial system; the over the whole system by the Reichswirt- flight of capital from the country was for- schaftsminister. He appointed and dismissed bidden and, of course, no influx of foreign the president (Leiter) of the Reichswirt- capital was to be expected-unless involun- schaftskammer, the leaders of the Reichs- tary (e.g. on clearing accounts). The interest gruppen (or Hauptgruppen in the case of rates in Germany therefore no longer bore manufacture) and the leaders of the Wirt- any necessary relation to those in foreign schaftsgruppen on suggestion of the head of markets, and could be manipulated arbitrar- the Reichsgruppe concerned. The leaders of ily by government action. As the government the "Fachgruppen" were appointed by the developed its vast recovery and rearmament leader of the Reichsgruppe. programs, involving budget deficits on an The Reichsgruppe Banken was divided unprecedented scale, it sought to ease its into the following Wirtschaftsgruppen: borrowing problems by excluding other bor- (1) Privates Bankgewerbe (private bank- rowers from the market and by forcing down ing) ; the level of interest rates. The first objective (2) Oeffentliche Banken mit Sonderauf- was attained by a combination of financial gaben (public institutions with special func- controls over private investment (allocation tions) ; of materials and equipment, etc.). The sec- (3) Oeffentlich-rechtliche Kreditanstalten ond involved some compulsory measures, but (public credit institutions) ; given the closed character of the financial (4) Sparkassen (savings banks) ; system, followed almost automatically from (5) Kreditgenossenschaften (credit coop- the great inflation of money and credit caused eratives) ; and by the government's fiscal program and fos- (6) Kreditunternehmungen verschiedener tered by the "easy money" policy of the Art (miscellaneous credit institutions). Reichsbank. All of these-with the exception of (2)- Already in 1932, under the Bruening re- were subdivided into Fachgruppen. The re- gime, the banking associations-then organ- gional organization of the Reichsgruppe ized on a voluntary basis-were induced to Banken now conforms to the division of the draw up a comprehensive schedule of interest Reich into 29 Wirtschaftsgaue. An exact rates to be charged and paid, which was then catalogue of the groups and of the institu- given the force of law by Reich decree. Under tions pertaining thereto will be given in a the Nazi regime, the broad powers conferred later chapter (see page 83). upon the authorities by the Reichsgesetz As in other fields, the process was one of fiber das Kreditwesen enabled increasing reorganization and simplification. Groups al- pressure to be brought upon the banks, which ready in existence often changed only their in February 1935 initiated a general reduc- names and were "gleichgeschaltet" (brought tion of all short-term interest rates. Then at into line with Nazi ideals). In the field of the end of 1936 new compulsory interest private banks there had existed since 1901 agreements drawn up by the Reichsgruppe the powerful Centralverband des Deutschen Banken were promulgated; with minor modi- Bank-und Bankier-Gewerbes whose members fications, the terms of these agreements were became the nucleus of the Wirtschaftsgruppe maintained until after the outbreak of the Privates Bankgewerbe. The Verband war. deutscher offentlich-rechtlicher Kreditanstal- Meanwhile, the long-term capital market ten, after giving up a few institutions to did not escape the attention of the Nazi group (2), became identical with the Wirt- authorities. By a resolution of the Reich gov- schaftsgruppe Oeffentlich-rechtliche Kredit- ernment of May 31, 1933, this market was anstalten; the Deutsche Sparkassen und completely subjected to the control of a com- Giro-Verband, a public corporation since mittee formed at the Reichsbank and later 1917, became identical with the Wirtschafts- at the Reichswirtschaftsministerium. New gruppe Sparkassen; and the two existing or- capital issues could be undertaken only pur- ganizations of the urban and agricultural suant to a license from this committee, which credit cooperatives, the Deutsche Genossen- judged applications solely from the point of schafts-Verband (urban) and the Reichsver- view of the general financial program of the band deutscher Landwirtschaftlicher Genos- Reich. In general, private borrowers-and even local government bodies-were there- pondingly alleviated (decree of March 26, after given access to the capital market only 1935). Furthermore, through the Gesetz fiber if the proposed projects were clearly essen- Zinsermassigung bei den offentlichen Anlei- tial to the Reich's developing war economy. hen of February 27, 1935, the loans of public At the same time, in order to encourage self- bodies (including the Reich) also were con- financing by industry and to reduce the ap- verted into 41/2 per cent bonds. These two parent attractiveness of corporate securities, transactions were of great magnitude, involv- a dividend limitation law (Anleihestockge- ing the conversion of outstanding issues of setz) was passed on December 4, 1934. It RM 10 billion and the reduction of the annual provided that no company could pay cash interest payments of credit institutions and dividends in excess of 6 per cent (in certain public bodies by more than RM 500 million. cases 8 per cent) on its paid-in capital, and Furthermore, the general reduction of inter- that if any larger amounts were allotted for est rates by the commercial banks in 1935 distribution to shareholders, the excess was was followed by the savings banks and in- to be paid over for a period to the Deutsche surance companies, and in July 1936 even Golddiskontbank for investment in govern- the rate of interest on private non-agricul- ment bonds. In the spring of 1938, the funds tural mortgages was regulated. The only impounded during 1934-37 were distributed parts of the debt structure which remained to shareholders in the form of non-interest- unregulated were private agricultural mort- bearing tax remission certificates, but the im- gages and the bond issues of private indus- pounding of excess dividends continued. trial corporations. Even in the latter case, A reduction in the general level of long- most corporations took advantage of the term interest rates on outstanding securities general decline in interest rates and con- was stimulated by the open-market opera- verted their issues to a 5 per cent basis as tions of the Reichsbank, authorized in Octo- soon as they became callable. ber 1933. Its intervention in the bond market soon brought issues of the Reich and States Financing of recovery and rearmament to par or over. A first step toward direct manipulation of the interest rate structure From the preceding sections it will be ap- was taken by the law of September 21, 1933 parent that under the Nazi regime the dis- (Gemeinde Umschuldungsgesetz) which ini- tribution of capital and credit became sub- tiated the funding into bond issues of the ject to the same sort of regimentation which short- and medium-term debts of all munici- affected all other factors in the totalitarian palities. The participating municipalities be- economy. "Market forces" largely ceased to came members of the Umschuldungsverband operate, and credit institutions were com- (funding association)-a newly-established pelled by direct and indirect pressure to con- public corporation managed by the Preus- form to the general pattern of activity im- sische Staatsbank-which issued its own posed by the government. Even under the bonds in exchange for the claims of the immediate pre-Hitler regimes, the dominant short- and medium-term creditors of the mu- policy of the government was to revive busi- nicipalities. The transaction covered a debt ness activity in the early stages in order to of RM 3.2 billion; the new bonds were issued combat unemployment and after 1935-36 to at 4 per cent (to be amortized in twenty develop Germany's material resources in years) and since the municipalities thence- anticipation of the coming conflict. This policy forth had to pay only that rate to the Ver- in both its stages involved huge government band rather than 7 to 8 per cent as pre- expenditures, and despite the increased yield viously, they realized a considerable gain of taxation as tax rates and taxable income from the transaction. In 1934 followed the rose, the budgetary deficits increased regu- conversion into Reichsmark securities of the larly and rapidly. The main purpose of the rye, wheat, and other bond issues based on present section is to trace the devious meth- real values, as well as of foreign currency ods by which the Nazis exploited the credit issues (mainly dollar-bonds) held in Ger- system to cover these deficits. many; the latter were converted at the rate September 1932 to September 1936. The of RM 3 to the dollar, and at considerably outstanding problem confronting the regimes reduced interest rates. immediately preceding the Nazis (von Papen The next step was a frontal attack on and von Schleicher) and the Nazi regime long-term interest rates, launched by the itself in its earlier years (until 1936) was Gesetz fiber die Durchffihrung einer Zinser- that of putting the unemployed back to work. missigung bei Kreditanstalten, dated Janu- The von Papen regime embarked on a policy ary 24, 1935. The interest rate on mortgage of "Ankurbelung der Wirtschaft" (cranking and municipal bonds issued by the mortgage the economy) through lowering the pressure and public credit institutions was reduced as of taxation and through public works. In of April 1, 1935, from 6 per cent or over to September 1932, Steuergutscheine (tax re- a uniform 41/2 per cent. The interest burden mission certificates) were issued to taxpayers on debtors of these institutions was corres- in respect to the bulk of their tax payments for the financial year 1932-33. These certifi- On May 1, 1933, Hitler outlined his policy cates were negotiable and had legal tender in a "Four Year Plan" for the abolition of quality of limited scope; any holder was en- unemployment. Among the many measures titled to use the certificates at their face incorporated into this Plan was the so-called value plus interest at 4 per cent to pay taxes "First Reinhardt Program", providing for from 1934-35 through 1938-39. Since at the the expenditure of RM 1,000 million for such time of their issue there was no other risk- purposes as housing, roads, agricultural and free short-term paper available, they became suburban settlement, river regulation, public a very popular investment with credit insti- utilities, etc. A grandiose scheme was tutions. By March 1933 a total of RM 500 launched for the construction of 7,000 kilo- million of certificates had been issued. metres of Reichsautobahnen (Reich motor The von Papen and von Schleicher regimes roads) at an estimated cost of RM 3,500 mil- furthermore drew up programs for expendi- lion. Both the "Reinhardt Program" and the ture of RM 1,240 million on housing, house Reich motor roads were again financed by repairs, roads, public utilities, etc. The most the issue of work creation bills. No exact novel element of these programs was the figures exist for the circulation of these bills, method of financing long-term investments since they were not included in the reported through "short-term" bank acceptances, a public debt, but it is believed to have reached scheme which in its technical features was RM 1,200 million at the end of 1933 and borrowed from the Akzeptbank. Because of RM 2,600 million one year later. Prior to the existing limitations on the Reichsbank's October 1933, when the volume of such bills discounts of Treasury bills and in order to was still fairly small, they were mostly dis- avoid a visible increase in the Reich debt, so- counted and retained by the commercial called "Arbeitsbeschaffungswechsel" (work banks. From then on, however, the supply of creation bills) were created. Private con- those bills increased so rapidly that the banks tractors--and in some cases public bodies- were forced to rediscount part of their hold- entrusted with public orders were authorized ings with the Reichsbank, and there was a to draw these bills, endorsed by the public rise in the market rate of discount. The body giving the order, upon certain special Reichsbank, therefore, intervened and began financial institutions owned or controlled by to discount the bills directly on a large scale. the Reich. The liabilities incurred by these By the end of 1934, the great bulk of them institutions in accepting the bills did not ap- is believed to have been held by the Reichs- pear in the "acknowledged debt" of the bank. Reich and other public bodies. Most notable The Nazis also continued for a while the among the accepting institutions was the issuance of tax remission certificates, the Deutsche Gesellschaft fur 6ffentliche Arbeit- circulation of which rose to a maximum of en (Oeffa), wholly owned by the Reich; the RM 1,963 million in March 1934, and there- Deutsche Bau- und Bodenbank and the Ren- after declined. tenbank-Kreditanstalt also accepted bills By the beginning of 1935 a large part of drawn in connection with certain projects. the work creation program initiated under After having been accepted, the bills could the Four Year Plan had been carried out and be discounted with any commercial bank- there were indications that the rate of re- sometimes the accepting institution itself- covery was slowing down. A new stimulus after which they might be rediscounted with was given in March 1935 when Hitler an- the Reichsbank. The work creation bills fell nounced the withdrawal of Germany from due theoretically after three months, but in the Disarmament Conference and the rein- practice could be prolonged indefinitely until troduction of conscription. Thereafter, the it was convenient for them to be redeemed. declining role of public works as a stimulus Prolongation was indeed necessary since the to employment was replaced by the insa- bills were used to finance debts payable by tiable demand for rearmament production. the public bodies over periods ranging up Financing of the new output. was provided to 25 years. as before by bills, issued from January 1935 The work creation bills initiated an era in till the end of under the harm- which the Reichsbank and the rest of the less name of "Sonderwechsel" (special bills). banking system were called upon to grant The suppliers of army equipment would gen- an increasing volume of credit on various erally draw on the Metallurgische Forsch- "short-term" instruments, the purpose of ungsgesellschaft (Institute for Metallurgical which was to finance directly or indirectly Research), which would accept such drafts the tremendous requirements of the reem- on behalf of the Reich. This paper (also ployment and later the rearmament program. called "Mefowechsel") could then be dis- When the Nazis came to power in January counted by the supplier with his bank. These 1933, they were quick to perceive the ad- special bills had an initial maturity of 6 vantages of this device, and promptly turned months but were renewable without limit; it to their own ends. having reached a maturity of 3 months, they were eligible for rediscount at the Reichs- The issuance of such loans directly to insti- bank. tutions with which savings regularly accu- Early in 1935 the Reichsbank resorted to mulate (savings banks, insurance companies, a device already employed in the post-stabi- social security funds, and credit cooperatives) lization period, i.e. the use of its subsidiary, has become a leading feature of the Reich's the Deutsche Golddiskontbank, as a means financial technique; they became known as of absorbing liquid funds from the market. "Li-loans", an abbreviation for "liquidity- Through the medium of the Reichsbank, so- loans", implying that they were to be re- called "Solawechsel," i.e. promissory notes garded as a liquid investment. Their terms of the Deutsche Golddiskontbank rediscount- remained the same throughout the pre-war able with the Reichsbank and falling due period, although later on the interest rate after 3 months, were sold to the credit insti- was reduced. tutions at the rate for bankers' acceptances. In September 1935 there was also an issue Credit institutions thereby lost part of their of Treasury notes (Verzinsliche Schatzan- liquid funds-i.e. giro balances at the Reichs- weisungen), the first of such loans to be bank-to the Deutsche Golddiskontbank offered for public subscription. They also which used them to relieve the central bank became a regular financing medium of the of part of its growing bill portfolio. Later in Treasury, being taken particularly by the the year, when the first issue of Treasury commercial credit institutions, the Girozen- notes under the Nazi regime was offered for tralen, etc. The Treasury notes bore interest public subscription in order to fund some of at 41/2 per cent, those issued in 1935 having the outstanding bills into long-term obliga- an issue price of 983/4, a maturity of 10 years, tions, a reversal of this procedure became and a yield to redemption of 4.75 per cent. desirable. When the loan came to be sub- Whereas in 1935 there was a marked differ- scribed and the banks had to transfer funds ence between the terms on the Li-loans and to the Reichsbank, the Sola-bills were al- on the Treasury notes, the maturity of the lowed to run off, thus putting the credit latter was gradually extended, and in 1938 institutions in a position to subscribe for the -when the Li-loans were still offered for 27 bond issues on their own or customers' ac- years to yield .4.68 per cent-the Treasury count. The Golddiskontbank, in order to pay note issues had a maturity of 20 years and off its Sola-bills, would rediscount bills held gave a yield of 4.65 per cent. By that time in its portfolio with the Reichsbank, which the main difference was that the Li-loans after the proceeds from the new loan issue were directly placed with a specified group came in, would pay off work creation or of institutions, whereas the Treasury notes special bills. Thus the funding was com- were offered for public subscription although pleted. After the loan was issued, the circu- they too were mainly purchased by credit lation of Sola-bills would be allowed to rise institutions. again to absorb the market's accruing liquid October 1936 to the outbreak of war. By funds until the moment was ripe for a new the fall of 1936 the success of the First Four- loan. In contrast to the work creation and Year Plan, the term of which had not yet special bills, the Solawechsel of the Gold- elapsed, was no longer in doubt. Unemploy- diskontbank did not represent a means of ment had ceased to be a serious problem, and credit creation but a means of absorbing there was practically full employment in the short-term funds and facilitating their con- building and engineering industries. The na- solidation in long-term issues. tional income was rising steadily and, allow- Total new long-term loans issued in 1935 ing for the fall in prices, had reached the amounted to RM 1,632 million and in 1936 level of the prosperity year 1928. Industry to RM 2,670 million, thus slowing down the and the banking system were fully liquid, rate of increase in the circulation of special and savings were flowing increasingly into bills. The issuance of long-term loans to fund the capital market. Thus far the policy of part of the nominally short-term indebted- credit and income creation had proved suc- ness was facilitated by the growth of savings cessful. among the general public which had fol- On the other hand, the fruit of the in- lowed the expansion of employment and out- creased production was already serving to put. A considerable part of these savings had build up the German war machine rather flowed in the first instance into the savings than to increase the standard of living. In banks and insurance companies, and in 1935 these circumstances a series of frictions the first long-term internal Reich loans arose. The income of the nation had grown (Reichsanleihe) since 1929 were issued, be- out of proportion to the production of con- ing placed directly with the savings banks sumption goods; industries were competing and insurance companies in an amount of for raw materials which had been scarce by RM 1.3 billion. These loans bore interest at increased demand, insufficient domestic pro- 41/2 per cent and ran for 27 years, yielding duction, and handicapped imports; and dis- -at the issue price of 981/4-4.68 per cent. satisfaction had arisen because of the policy of preventing wage increases despite growing customs, and by the absorption of all avail- prosperity and a high level of employment. able capital resources through the issue of It had become increasingly necessary to com- long-term government loans. bat price inflation by stringent price control, It proved impossible, however, to abstain taxation, and stimulation of savings. from further short-term borrowing, since the At this juncture, in September 1936, Hitler political events of 1938 and the growing in- announced the second Four-Year Plan, to be ternational tension caused a further intensi- administered by General Goering as the fication of rearmament expenditure (e.g. on supreme head of Germany's economic organi- the "West-Wall"). Instead of special bills, zation. The primary objective of the second which had yielded the banks 3/2 to 4 per cent Four-Year Plan was to render Germany in- and which had been eligible for rediscount dependent as far as possible of foreign sup- at the Reichsbank, the Reich from now on plies, including all raw materials used in issued 3 per cent "Lieferschatzanweisungen" industrial production and necessary con- (delivery notes) running for 6 months which sumption goods as well. As a result, the were given in payment to suppliers. It is im- demand for the construction of enormous portant to note that they were not eligible new factories for the manufacture of domes- for rediscount although they could be used tic raw materials (e.g., "ersatz" wool, rub- as collateral for Lombard loans of the Reichs- ber, and gasoline) was added to the already bank. This gave the Reichsbank more free- existing requirements of rearmament, hous- dom of action and threw the weight more ing, motor roads, etc. The mobilization of on open-market operations, i.e. the sale of all resources for this immense task brought a short- or long-term government securities to still greater degree of government control the banks at the Reichsbank's own discretion. and interference with economic forces. The While the special bills were normally re- Government made it known that it expected newed, the 3 per cent delivery notes were the existing industries to bear the risks of currently redeemed out of taxes and other the new investments and to finance them out revenues of the Reich. Since the Reich did of their own issues. The ban on new issues not issue any special bills to suppliers after on the capital market, which had been very April 1, during the following six months the severe, was somewhat relaxed, and industrial bills of this type were all presented for re- bond and stock issues, which in 1935 had demption at the Reichsbank, as agent of the amounted to RM 159 million only, rose to Reich. The amount of bills flowing back to RM 442 million in 1936, to RM 591 million the Reichsbank reportedly totalled RM 12 to in 1937, and to RM 929 million in 1938. Apart 13 billion, of which the bulk came from from these issues, industry was encouraged credit institutions but about RM 11/ to 2 bil- to finance a share of the new capital expendi- lion from armament industries. The bills pre- tures out of profits. viously in industrial hands were taken into The market for government bonds devel- portfolio by the Reichsbank and the Deutsche oped on the same lines as in 1935-36. Long- Golddiskontbank, whose aggregate bill hold- term issues amounted to RM 3,150 million ings rose from the end of March to the end in 1937, and RM 7,744 million in 1938. Finan- of November by RM 2.2 billion. The bills cing through special bills was also continued. which had been held by credit institutions, The bill holdings of the Reichsbank and on the other hand, were acquired by the credit institutions increased by more than 10 Reichsbank as trustee and used as security per cent annually, reaching RM 11.6 billion for the issuance of so-called "Mefowechsel- in April 1936, 13.8 billion in April 1937, and Bescheinigungen", remitted in round denom- inations with maturities varying from 3 15.1 billion in . The rate of in- 5 crease did not accelerate because the capital months to a year. This new paper was market for public and industrial issues fur- promptly placed by the Reichsbank with nished considerable funds. Nevertheless the credit institutions, which were willing buyers bill holdings of the Reichsbank and credit in- since this paper-like the special bills- stitutions, which in April 1933 had amounted could be shown under their commercial bill to RM 6.9 billion, had already doubled by the portfolios. This whole operation thus resulted end of 1937. in no substantial change; gradually, however, the Reich redeemed the special bills and the It was mainly the increase in the bill issue Reichsbank correspondingly retired Mefo- which in the spring of 1938 gave rise to a wechsel-Bescheiningungen, so that the circu- change in the methods of financing. On lation of the latter had been reduced to March 11, 1938, Dr. Schacht announced a RM 23/4 billion at the end of 1942. In the new drive for the final consolidation of the middle of 1943, it was announced that the short-term indebtedness. From April 1, 1938, Mefowechsel-Bescheiningungen would be al- a ban was placed on the further issuance of lowed to run off without renewal; presum- special bills to finance expenditures of the 5 Since the Reichsbank acted as a trustee only, the special bills Reich. For the future all public credit needs did not appear among its assets nor did the Mefowechsel-Bescheini- were to be met by receipts from taxes and gungen appear among its liabilities. ably this means that the "undisclosed debt" through a decree of October 22, 1939. The of the Reich has reached the final stage of right of the Gewerbliche Wirtschaft to pay liquidation. 40 per cent of its debts in certificates was Returning to 1938, it was, generally speak- canceled as of April 1, 1940, through a de- ing, only the method of credit expansion cree of March 20, 1940. which was changed during that year. The delivery notes were used like the special 2. War-time Developments bills as a means of short-term pre-financing, and at the beginning of May 1939, the com- Financial developments in Germany during mercial banks held about RM 2 billion of the war period have been dominated com- the RM 3 billion of notes issued in the pre- pletely by the huge expenditures of the ceding months. In May, however, the issu- Reich on the prosecution of the war. The ance of delivery notes was stopped with the following section contains a review of the adoption of the "Neue Finanz Plan", another role of German credit institutions in the Ger- short-lived scheme which was discontinued man program of war finance. It, therefore, in important points with the outbreak of war. constitutes in a sense an introduction to Part Under this plan, Li-loans were to continue to III, in which a detailed description of the be placed directly with insurance funds, sav- institutions is given together with an account ings banks, and municipal funds, but no of their development during the war years. further 41/2 per cent long-term Treasury notes The development of a totalitarian system were to be offered for public subscription. of currency and credit during the 'thirties is The open capital market was to be left for seen in retrospect to have been an integral the financing of private construction work. part of Germany's preparations for war. The Furthermore, the delivery notes were to be mobilization of financial resources for actual supplanted by the issuance of "Steuergut- war involved scarcely any institutional scheine" (tax remission certificates) already changes, since the appropriate techniques known from the days of the Papen regime had already been developed during the re- (see above). covery and rearmament period. It was only The professed object of these new certifi- necessary to accelerate the tempo of financial cates was to mobilize the last cash reserves developments in order that the Reich's vastly of the economy for government financing. increased fiscal requirements might be satis- Like their predecessors, they were a strange fied. It is therefore appropriate to commence hybrid of a security and a medium of ex- the following section with a brief review of change. They were to be issued by the Reich the nature of Germany's war-time fiscal and other public bodies to cover 40 per cent program. of their payments to suppliers, 20 per cent of such payments' being made in Series I cer- The principles of German war finance tificates and an equal amount in Series II. Series I certificates were non-interest-bearing In order to comprehend the significance of and could be used at their face value after Germany's war finance program, it is neces- between 6 and 7 months for the payment of sary to consider the basic principles of fiscal all Reich taxes and tariff duties. The Series II policy in a country fully mobilized for war. certificates on the other hand were to run It should first be recognized that if a gov- for from 36 to 37 months and were to be ernment has the power to print money in acceptable thereafter at a premium of 12 per unlimited quantities, or to borrow money cent (thus yielding about 4 per cent interest) from a central bank with unlimited note- in payment of Reich taxes and tariff duties. issuing capacity, it need never lack the funds In addition both classes of certificates were for making any desired expenditure. The granted limited legal tender quality for pay- fundamental fiscal problem of such a gov- ments within the "Gewerbliche Wirtschaft" ernment therefore is not whether or not it (manufacturing, the crafts, and trade), in can finance the war, but rather how to fi- which they could be used in lieu of cash to nance the war with a minimum of friction meet 40 per cent of invoiced amounts. Busi- in the economic system. The principal friction ness enterprises received a special induce- inherent in a war economy arises from the ment to hold Series I certificates, in the form disproportion between personal incomes in a of special tax concessions conferred by such belligerent country and the value-at exist- holdings, but this class of certificates was ing prices-of the consumable goods flowing eligible neither for rediscount nor as a col- to the civilian sector of the economy; the lateral for Lombard loans. Credit institutions, government's expenditures generate incomes on the other hand, were expected to hold the but the goods in the production of which Series II certificates, which were eligible for these incomes are earned are swallowed up Lombard loans, as an interest-bearing re- by the military machine. This disproportion serve. tends to create inflationary pressure under Soon after the outbreak of the war, the the price structure which if allowed free issue of further certificates was discontinued rein, would progressively undermine the value of the currency and lead to a collapse invest surplus funds in Reich securities. Gen- of morale and productive activity on the erally speaking, however, the most marked home front. Especially in Germany, where characteristic of German war finance has there are still vivid memories of the catas- been that the government has allowed most trophic inflation after the last war, the sta- of the "excess income" to pile up in the form bility of the currency was necessarily a prime of deposits with credit institutions, and has objective of fiscal policy. been satisfied to have these institutions pass When confronted with this basic problem, the funds on to the Reich through subscrip- the Reich government might have chosen tions to government securities. It has not even various courses of action. On the one hand, issued securities designed to attract the pub- it might conceivably have imposed taxes or lic's savings; there are no "war savings compulsory loans of such a vigorous charac- bonds" in Germany. ter that the disposable income of the public The result of this process (often alluded would be reduced to the value-at existing to in Germany as "noiseless war finance") is prices-of civilian goods production. Ob- that the dammed-up purchasing power of the viously, however, when the government is German public is less firmly immobilized taking the great bulk of current output, as than if it had been mopped up by the sale at present in Germany, this is a counsel of of government securities. At the same time, perfection, especially since the mopping-up however, most of it is held in a much more of current income would have to be supple- stable form than currency hoards. The gov- mented by a ban on the spending of accumu- ernment has conducted an intensive cam- lated savings by the general public. At the paign to induce people to place their surplus other extreme, the government might have funds in savings deposits (withdrawals from relied entirely upon its price control and which are subject to certain delays and lim- rationing apparatus to stifle any tendency itations), and indeed has offered very sub- toward inflation of the price level, and have stantial tax concessions to those willing to financed the war simply by disbursing bank place sums in the so-called "iron savings" notes obtained from the Reichsbank against accounts and certain "business savings" ac- Treasury bills. Under these circumstances, counts, which in principle may be drawn ignoring for the moment the existence of upon only after the war. It has also issued banking facilities, the public would simply very general decrees against excessive cur- have been forced to save in the form of cur- rency hoarding, which has been prosecuted rency the amount of its "excess income". By on some occasions in the "Peoples Courts" as this procedure, the Reich would have in- an offense against the public interest. It curred a debt but the service thereon would should be recognized, however, that this ef- have been no real burden since the interest fort to induce people to hold bank deposits paid to the Reichsbank would have flowed rather than cash is justified mainly by psy- back to the Reich as the residual beneficiary chological considerations-persons presum- of the Reichsbank's profits. The practical ob- ably are less tempted to spend if the money jection to this course, however, was that the is in a bank rather than under the mattress, resulting mass of ready purchasing power in and the unsophisticated public worries less the hands of the public would have threat- about coming inflation if bank deposits rise ened to engulf the direct price and rationing rather than note circulation. The Nazi author- controls, especially since in the public mind ities have taken no drastic steps to deal with the volume of currency in circulation is usu- the great increase in note circulation which ally regarded as an index of the degree of has in fact occurred. They realize that, aside inflation or inflationary pressure. from the psychological considerations noted Germany, like all other belligerent coun- above, the government derives a real advan- tries, has steered a course intermediate tage from currency hoarding. To the extent between these two extremes. The highly of such hoarding, it is able to finance its effective price and rationing controls have expenditures through the Reichsbank with- remained the principal bulwark against in- out incurring any real interest burden; in flation of the price level, but efforts have other words, those who hold the currency are been made to reduce the pressure of "excess in effect granting an interest-free loan to the income" on this structure. By contrast with Reich. the policy in most other belligerent countries, The principal effect of war finance upon however, these efforts have not aimed pri- German credit institutions has been to con- marily at mopping up income through higher vert them largely into intermediaries be- taxes or through pressure on the public to tween the public and the Reich Treasury. subscribe to government loans. Of course, This is true not only because of the "noise- there have been some increases in tax rates less finance" technique, but also because of a and German taxes were already relatively related phenomenon, the general tendency heavy before the war; also some "induce- for the demand for bank credits to decline in ments" have been offered to corporations to all quarters except the Reich Treasury. This tendency is traceable directly to the rise in two Reich institutions (Kassen) named above. the "excess income" of the public which has As demonstrated in the following section, been discussed above. Since, given the rigid some 17 per cent of the Reich's total expendi- price and rationing controls, the public has tures in 1939-1943 inclusive (24 per cent in had perforce to save this income rather than 1943 alone) was financed by foreign coun- spend it, a great many individuals-and espe- tries in these various ways. cially the farmers-have not only ceased new borrowings but have tended to pay off old War-Time financing of the Reich through debts to banking institutions. Much the same credit institutions non-essential business enter- has been true of Broad estimates for the principal elements prises, which have found themselves with of in the Reich government's budget in the period liquid funds available for the repayment 1943 and in to from the end of 1938 through bank credits because of their inability are sum- or even to make the calendar years 1942 and 1943 maintain their inventories page. in their capital assets. Of marized in the table on the following good depreciation apparently covered some in war industries are in a differ- The Reich government course, firms expenditures out of current although even they have tended 53 per cent of its ent category in 1939-43 but less than half in 1943 to rely heavily upon advance payments on receipts increase in ordinary domestic rev- Reich contracts as a source of working capi- alone. The winter of 1942-43, the enues fell far short of the rise in expenditures; tal. When, during the only 36 per announced the severe limitation in 1943, these revenues covered government as compared with 48 per -at least temporarily-of these advance cent of expenditures the commercial banks are reported cent in 1940 for example. Even the large growth payments, did not suffice to fill enjoyed some revival of their indus- of occupation payments to have of the true borrowing trial credit business. the gap. Well over half important aspect of German war fi- was at short term; the sources of the borrowed One paragraphs. nance remains to be mentioned, i.e., the ex- funds are traced in the following tent to which Reich expenditures have been Borrowing from foreign sources. As noted financed abroad rather than in Germany previously, part of the Reich's borrowing has itself. For purposes of simplification, it has been financed in foreign countries, and should been assumed in the discussion above that all be deducted from the total in order to arrive government expenditures have been covered at the portion financed in Germany itself. All from domestic resources. In fact, however, borrowing from foreign countries has been at the local expenditures of the German Army short-term. The following table shows a break- and German troops in areas outside Germany down of the borrowing by sources: have been financed locally-in most occupied countries by the payment of occupation costs, Borrowing from Foreign and Domestic Sources and in other occupied countries and in the (Billion RM) Axis satellite states, by loans from the local 1939-43 government or central bank to the Reichs- (inclusive) 1942 1431 kreditkasse or by balances accumulated at the Verrechnungskasse, the financial agency Borrowing from: 6 the Verrechnungskasse.------1 17.0 5.5 8.0 of the German Army. Furthermore, Reichskreditkasse ------7.5 2.2 1.9 Reich government has also thrown on foreign Konversionskasse.------.. ----- .2 0.0 .1 Nederlandsche Bank .------4.0 1.1 1.7 countries the burden of financing Germany's Banks in Bohemia-Moravia------.--- 5.6 1.3 2.3 net imports during the war period, as well Total borrowing from foreign sources ...... 34.3 10.1 14.0 as the pay of foreign workers in Germany to Total borrowing from domestic sources-..._ 182.3 46.1 52.0 the extent that this was remitted home by Total borrowing_------...... 216.6 56.2 66.0 these workers. In general, foreign claims on arising from these sources have 1 Reichskreditkassenscheine circulating in foreign countries and Germany of the Reichskreditkasse to foreign central banks. been accumulated by foreign central banks debts and governments in the forms of clearing It therefore appears that the Reich covered balances with the Deutsche Verrechnungs- about 16 per cent of its true deficit in 1939-43 kasse, a Reichsbank subsidiary, which has from external sources and some 21 per cent invested these accruing funds in Reich securi- in 1943 alone. As noted previously, the Deutsche ties. Finally, the central banks of Bohemia- Verrechnungskasse (for a fuller description, Moravia and the Netherlands, because of the see page 76) has lent the Reich the funds special status of these countries in the Ger- accumulated with it on behalf of foreign cen- man exchange control system, have been tral banks and governments, balances which "allowed" to invest directly in Reich Treas- had resulted from Germany's unfavorable ury bills the funds which they would other- of trade and services with most of the balance wise have had to hold without interest at the countries in Continental Europe (see page 8 Where the occupation currency issued by this agency still cir- 77). The Reichskreditkasse (for further culates-mainly in Russia-the loan is made in effect by the local population. description, see page 77) has financed the Reich by issuing occupation currency and bor- The domestic and foreign participations in rowing from local central banks in countries the financing of the Reich's expenditures are where German troops are stationed. These ope- summarized in the following table: are directly reflected as Reich borrow- rations of Reich Expenditures ing, since all outstanding obligations of the Financing Reichskreditkasse are secured by its claims 1939-43 inclusive 1942 1943 against the Reich. Furthermore, the Konver- Source (see iion Billion Billion ercent sionskasse fur deutsche Auslandsschulden RM RM R Percent page 75) operates-on a relatively insignifi- RMPercent M Percent cant scale-with funds held on behalf of foreign Domestic: (principally in the United States and Revenue------197 43 53 43 47 36 creditors 40 the United Kingdom), which it presumably in- Borrowing ------182 40 46 38 52 vests mainly in short-term Reich securities. Total__------379 83 99 81 99 76 Finally, the Nederlandsche Bank and all im- Foreign: ------45 10 14 11 17 13 Contributions 11 portant credit institutions of Bohemia-Moravia, Borrowing------34 7 10 8 14 being forced to accumulate funds instead of 79 17 24 19 31 24 without interest at the Reichskreditkasse and Total- _------100 Verrechnungskasse, have been allowed to use Grand total ----- 458 100 123 100 130 their accruing Reichsmark for investment in Treasury bills. This technical difference Reich Borrowing from domestic sources follows from the fact that there are no exchange restrictions between the Reich and these two There remains to be examined the extent areas. to which the Reich's borrowing from domestic sources has been effected through credit insti- Revenue and Borrowing of the Reich tutions. Summary balance sheets for all credit (Billion RM) institutions in the Reich appear at the end of the Handbook, showing inter alia the hold- 1939-431939-431942 1943 (inclusive) ings of Reich securities by these institutions at the end of the years 1938, 1942, and 1943. ------Tax revenue' - 157 43 35 Estimates derived from these data are con- Local government contributions, earnings of public in the table on the following page. enterprises, etc -----...---..------40 10 12 tained Occupation costs .. .- .. . . 45 14 17 The information in this table necessarily Total revenue--.....---.------.------242 67 64 represents rough estimates in some cases, es- Long-term borrowing'-....-----.------4 ------87 23 23 Short-term borrowing . ... . 130 33 43 pecially as to the distribution between long- Total borrowing---...... ----...... --.... 217 56 66 term and short-term Reich securities. It in- period 1939-43 Total revenue and borrowing..-.---...-----. 459 123 130 dicates, however, that in the inclusive, credit institutions supplied nearly borrow- 1 Includes a special item of 8 billion RM in 1942 representing 94 per cent of the Reich's short-term receipts from capitalization of house rent tax. ing from domestic sources, while credit and 2 The item for occupation costs is an estimate of actual receipts. for It does not include those payments from France which were not insurance institutions together accounted currently spent by the Reich but held as a currently available nearly 85 per cent of the long-term borrowing. balance of the Reichskreditkasse in the Bank of France. The unspent balance thus held by the Reich through the Reichskreditkasse In fact, of the 194 billion RM raised by the amounted to the equivalent of 3.2 billion RM at the end of 1941, during 1939- 0.8 billion RM at the end of 1942, and 0.5 billion RM at the end Reich from all domestic sources of 1943. In 1943, the relationship between "occupation costs" and 43, the general public in Germany (individuals, the Reich budget apparently was changed. In the official debt statement of the Reich the unused part of the French occupation industrial and commercial firms, etc.) con- costs probably was regarded as a direct credit balance of the Reich billion RM, and was deducted from the loan of the Reichskreditkasse. An tributed directly only about 19.0 adjustment has been made in the item "short-term borrowing" or 10 per cent. Over 40 per cent of the short- of the above table by adding the amount to the officially re- ported short-term debts (see footnote 4). term borrowing from domestic sources was s According to the official debt reports of the Reich, long-term financed by the Reichsbank and the Golddis- borrowing amounted to 89 billion RM in the period 1939-43.. This figure must be adjusted for the loans issued for the conversion of kontbank, while 17 per cent came from the old Austrian, Czechoslovak, Yugoslavian, and Polish loans amount- cent from the ing to 1.7 billion RM. commercial banks and 21 per SAccording to the official debt reports of the Reich, short-term savings bank system. The savings banks were borrowing amounted to 139 billion RM in the period 1939-43, to 34 billion RM in 1942, and to 46 billion RM in 1943. The reported by far the most important source of long-term figures must be adjusted for the amortization of the "undisclosed" borrowing also; together with insurance insti- short-term debt represented by special bills (Mefowechsel and Mefobescheinigungen, see page 41) which is believed to have de- tutions, they financed about two-thirds of the clined from about 12.5 billion RM at the end of 1938 to 3.1 bil- lion RM at the end of 1943. A new undisclosed debt has. arisen total Reich borrowing in this form. The credit during the war period because of the issuance of Army promis- cooperative system should also be mentioned sory notes, but the amount of these outstanding at any time is not believed to have exceeded a few hundred million Reichsmark. as another important contributor to Reich fi- Changes in the Reichsmark balances held by the government are unknown, but are believed to be small. However, the public nancing of both a short-term and long-term giro balances with the Reichsbank (Giro-accounts of the public character. Treasuries including those of the German Post Office and of the German Railroads) have been deducted from the working credits Of course the money savings in Germany of the Reich as shown in the official debt statements. In order Reich Treasury via to make up for a change in the official debt statement of the which have flowed to the Reich in 1943, the credit balance of the Reichskreditkasse with financial institutions have been made by in- the Bank of France was added to the loan of the Reichskredit- kasse to the Reich (see footnote 2). dividuals and business firms, and the counter- 47 Reich Borrowing from Domestic Sources' Ownership of the Reich debt-end of 1943 (Billion RM) At the end of 1943, the total debt of the 1939-43 inclusive 1943 Reich, as disclosed in official statements, was 255.0 billion RM, including 110.7 billion RM Long- Short- Long- Short- of long-term and 144.3 billion RM of short- Total term term Total term term term debt (see footnote to the table below). This table, also based mainly upon the data Financed by credit2 - - institutions:- Reichsbank ______34.6 -0.2 34.8 12.4 _----- 12.4 presented in the general table at the end of Rentenbank_------1.22------1.2 ___, ______Golddiskontbank _ 3.6 --0.1 3.7 1.4 _- _ 1.4 the money and banking section, shows the ex- Reichskreditkasse-----______1.6--______Postal checking and savings tent to which this disclosed debt was in the systems___-- 2 - - -______- - 6.8 4.7 2.1 2.7 1.8 0.9 Commercial banks ___ __ 18.8 2.8 16.0 2.0 0.2 1.8 hands of credit and insurance institutions. Credit cooperative system-_- 16.8 8.4 8.4 6.6 2.6 4.0 Savings banksystem ------59.3 39.1 20.2 18.5 12.9 5.6 Mortgage and other special Disclosed German Reich Debt Held by Credit cand institutions------4.1 1.4 2.7 1.9 0.3 1.6 Insurance Institutions Total_----______--____1468 57.3 89.5 45.5 17.8 27.7 End of 1943 (Billion RM) Financed by insurance institu- tions: Insurance companies ------9.5 9.5 ____-2.6 2.6 Total Long-term Short-term Socialinsurance funds______9.0 9.0------1.9 1.9

Total------18.5 18.5------4.5 4.5 "External" institutions: Verrechnungekasse______17.0------17.0 Direct 4public- - -- - subscription------(resi------Reichskreditkasse______7.0------7.0 dual) 19.0 12.8 6.2 2.1 .8 1.3 Konversionskasse------.8 ------.8 Nederlandsche Bank______-______- 4.0 ------4.0 Grandtotal ------184.3 88.6 95.7 52.1 23.1 29.0 Banks in Bohemia-Moravia------5.6 ------5.6 Total------34.4------34.4 1RM 1.7 billion does not represent new borrowings, but issues of the. Reich which had originated from converting debts of in- Monetary institutions: corporated territories into debts of the Reich. Reichsbank- ______-______--41.7------41.7-- 2 Including the holdings of Mefo-bills and Mefo-certificates (see Rentenbank------1.6 1.6 page 41). Golddiskontbank'l------2- 3.4 .1 3.3 8 Notes of the Reichskreditkasse held by the German Army. Reichskreditkasse______1.6 ------1.6 'Includes 0.8 billion RM for special "business deposits" with the Postal checking and savings systems ---- 7.9 5.3 2.6 Reich Treasury during 1943 (see footnote 10, page 49). Total______-__-_____ 56.2 7.0 49.2 part of the Reich's debt to these institutions Other credit institutions: Commercial banks______26.0 4.3 21.7 is to be found in the public's holdings of cur- Credit cooperative system------17.6 9.2 8.4 rency, bank deposits, and-in the case of in- Savings bank system______66.2 45.0 21.2 Mortgage and other special institutions-- 4.7 1.8 2.9 surance institutions--insurance policies. The combined note issue of the Reichsbank and Total------114.5 60.3 54.2 Rentenbank increased by 26 billion RM in Insurance institutions: Insurancecompanies_--______11.4 11.4 1939-43, while deposits held by the public Social insurance funds__------______12.0 12.0 with credit institutions (including the postal Total ------23.4 23.4 checking and savings systems) rose by 116 Residual: billion RM. The increase in the public's hold- Externaldebt______1.2 1.2 ings of currency and bank deposits was there- In public hands------25.3 18.8 6.5 fore around 142 billion RM. This figure closely Total______26.5 20.0 6.5 approximates the reported increase in the hold- Grand total_- ______-- -______255.0 110.7 144.3 ings of Reich securities by "internal" credit 1 The reported long-term debts. include 1.2 billion RM of old institutions (146.8 billion RM minus 1.6 billion "external" Reich debt and about 1.7 billion RM of converted gov- of Reichskreditkassenscheine = 145.2 Billion ernmental debts of territories incorporated in the Reich (see foot- note 8, page 47). The reported short-term debts do not include 8.1 RM). billion RM of Mefo-bills probably held by the Golddiskontbank (see The Reich's policy of footnote 4, page 47) and the equivalent of 0.5 billion RM held in encouraging savings the account of the Reichskreditkasse with the Bank of France (see deposits, on which there are formal with- footnote 2, page 47). On the other side, the "working credit with the Reichsbank" is reported as a gross figure which does not take drawal restrictions, is reflected in the fact that into account the 0.6 billion RM of government giro balances with over 60 the Reichsbank (see footnote 4, page 47). per cent of the increase in deposits held 2 Notes of Reichskreditkasse held by German Army. by the public took place in this category. Savings deposits with savings banks alone in- At the end of 1943, financial institutions in the creased by 48.9 billion RM in 1939-43 inclusive, categories listed held over 80 per cent of the while those with other institutions (postal disclosed long-term debt of the Reich and savings system, credit cooperatives, commer- nearly 96 per cent of the disclosed short-term cial banks, etc.) rose by 26.5 billion RM. The debt. The "noiseless finance" of the war period 40 billion RM of deposits other than savings had resulted in a substantial change in the deposits acquired by the public during the distribution of ownership of the long-term period under review, nearly half of which ac- Reich debt, only two-thirds of which was held cumulated with commercial banks, was mainly by "internal" financial institutions at the end in accounts used for checking and "giro" trans- of 1938. However, in 1938, as in 1943, credit fer purposes; however, a substantial propor- institutions held almost all the short-term Reich tion represented time deposits. placed for a debt. The same process produced an equally fixed term, mainly by business firms. marked change in the character of the assets held by credit institutions. At the end of 1943, The non-interest bearing Schatzanweisungen it is believed that Reich securities constituted are not eligible for rediscount, but are accept- about 94 per cent of the Reichsbank's total able as collateral for Lombard loans at the assets as compared with only 62 per cent at Reichsbank when they come within one year the end of 1938. 7 During the same period, this of maturity. percentage rose from 21 to 60 per cent for the Until June 1939, when a provision of the 6 big Berlin commercial banks, 8 from 12 to Reichsbank law limiting the Reichsbank's in- 71 per cent for the credit cooperative system, vestment in this paper to RM 400 million was and from 26 to 75 per cent for the savings repealed, Reichsschatzwechsel, also called bank system. 9 Reichswechsel, played only a minor part in Reich financing and as an investment for credit War-time borrowing instruments institutions. Thereafter, the issue of this paper During the war period, the Reich has not is said to have greatly expanded; however, no experimented so much with different financial precise data are available, since in the debt instruments as in the preceding years. Short- statements of the Reich and in the balance term funds have been raised principally sheets of credit institutions, Reichswechsel and through the sale of non-interest-bearing Treas- unverzinsliche Schatzanweisungen are grouped ury bills (unverzinsliche Schatzanweisungen together in one item. The Reichswechsel are a and Reichsschatzwechsel) to the Reichsbank really short-term paper with maturities of 30 to and credit institutions in general, while long- 90 days, and are eligible for rediscount and as term issues have continued to take the form collateral for Lombard loans at the Reichsbank. of interest-bearing Treasury notes (verzins- They are discounted by banks at a rate some- liche Schatzanweisungen), also issued to the what above that for the sola-bills of the Deut- credit institutions in general, and of Li-loans sche Golddiskontbank (21/8 as against 21/16), ("liquidity" loans) placed directly with sav- and have become a strong competitor of the ings banks, Girozentralen, insurance companies, sola-bills. social security funds, and cooperatives. How- Shortly after the outbreak of the war, the ever, there was still some use of special short- emission of Steuergutscheine which had been term instruments. The Steuergutscheine (tax inaugurated under the "Neue Finanz Plan" remission certificates) introduced early in 1939 (see p. 44) was discontinued, and on April 1, were no longer issued after November 1, but 1940, these certificates were deprived of their in September 1939 a new war-time instrument character as means of payment. At the end appeared in the form of short-term Wehr- of 1939, they were outstanding in the amount machtverpflichtungsscheine (Army promissory of RM 4.7 billion, which was reduced at 3.5 notes), issued for the purpose of making ad- billion at the end of 1941 to about 1 billion vance payments to war contractors, who could at the end of 1943. While at the end of 1943, sell these notes to their banks or use them as Series II certificates had practically disap- collateral for loans. 10 peared-they amounted to RM 12 million only Unverzinsliche Schatzanweisungenare issued -they were still Series I certificates outstand- in two maturities. At the end of 1939, the two ing of RM 1,139 million. In March 1944, it series had a life of 4-5, and 12-13 months re- was announced that Steuergutscheine would spectively, but the maturities on new issues be deprived from 1945 on of those features were gradually extended, and since February which had made them a tax saving investment, 1943 have been 6-9 and 19-22 months. The and at the same time the holders of the cer- discount rate for the short-term maturities, tificates were offered conversion at a premium which was 31/4 per cent at the beginning of into interest-bearing Treasury notes, an offer the war, worked its way down to 23/8 per cent which will expire on April 1, 1945. Uncon- in 1941 and this rate has since been main- verted certificates can be used as before for tained. The corresponding rates for the longer tax payments. The tax certificates are shown maturities were 33/4 and 27/8 per cent, the latter separately in the Reich's debt statements, but rate having also been maintained since 1941. not in the balance sheets of credit institutions, where they are grouped in a single item to- SThe Reichsbank is believed to have held in its portfolio about 6.2 billion RM of Mefo-bills in 1938 (see footnote 4, page 47). gether with other short-term Reich securities. The Mefo-bills were not included in the disclosed Reich debt. To Wehrmachtverpflichtungsscheine (Army make the above comparison between 1938 and 1943 more realistic, however, this amount was included in the amount of Reich securi- promissory notes) were first issued to war ties held by the Reichsbank in 1938. ts These banks held about 1.2-1.5 billion RM of Mefo-certificates contractors in September 1939 to facilitate the in 1938, which in 1943 were exchanged against Sola-bills of the conversion of industry to war-time operations. Golddiskontbank (see footnote 1, page 48). If these indirect hold- ings were included in the calculation, the share of Reich securities Later they apparently became a regular in- in the assets would be 34 per cent for 1938 and 64 per cent for 1943. 9 Excluding double counting for both the cooperative and the strument for making part of the advance pay- savings1 bank systems. ments given by Army procurement agencies to Also in 1942, business firms were offered the opportunity of depositing reserve funds directly with the Treasury, to be used for war contractors up to an agreed proportion of reconstituting their capital equipment and inventories after the war. Although these "business deposits" (Betriebsanlageguthaben the contract price. These notes were issued in and Warenbeschaffungsguthabon) were encouraged by substantial denominations of RM 10,000 and up, with a ma- tax concessions, the amount deposited up to mid-1942 was only some RM 760 million and has increased but slightly since that time. turity of 2-3 months, but were eligible neither 49 for rediscount nor as collateral for Lombard In 1942 and 1943, Li-loans were issued at 985/8 loans at the Reichsbank. They were not inter- with a final maturity of 29 years, giving a yield est-bearing, but contractors could readily dis- of about 3.57 per cent. In 1944 a quite different count them at 2 to 31/2 per cent with a credit type of Li-loans was issued in the form of a 31/ institution or use them as collateral for bank per cent limited annuity loan (Zeitrentenan- loans. Although credit institutions are in- leihe) issued at 985/8, completely amortized in structed to show their holdings of these notes 30 years and yielding 3.64 per cent. Amortiza- in the item covering short-term Reich securi- tion begins after 5 years, and for 25 years ties, the Wehrmachtverpflichtungsscheine ap- thereafter an annuity of 6 per cent is paid on parently are not included in the Reich's official each bond, covering 31/2 per cent interest and debt statements. Therefore precise estimates of 2 1/2 per cent amortization.12 the amount outstanding cannot be given, but it The interest-bearing Treasury notes and Li- is believed that the circulation of such notes loans, like the standard short-term securities of averaged only RM 300 million in 1942, although the Reich, are "on tap" at the Treasury at all total advance payments were very much larger. times; in other words, there is a steady flow of In the fall of 1942, the Reich announced a dras- subscriptions rather than periodic drives. A tic curtailment of advance payments, but the further feature of German practice is that nor- implementation of the measure was delayed mally subscribers do not receive physical securi- until the spring of 1943, and some reports have ties, but only a claim on a "collective security indicated a renewal expansion of advance pay- deposit" held with the Reichsbank. ments later in the year. In 1938, verzinsliche Schatzanweisungen (in- Development of the capital market terest-bearing Treasury notes) had borne in- The capital market in Germany had been terest at 41/2 per cent with a maturity of 20 almost fully adapted to war conditions in the years and were priced to yield 4.65 per cent. pre-war years and few notable changes have No Treasury notes were issued thereafter until occurred during the war period. The market has March 1940, when the issue was resumed at an continued to be reserved exclusively for issues interest rate of 4 per cent, a maturity of 5 years, of the Reich or other issues which directly or and an issue price of 991/4 (yield 4.33 per cent). indirectly serve the purposes of war finance.13 The terms were gradually stiffened on the suc- Given this close control, and the greatly in- cessive issues made during the year, mainly by creased liquidity of the economic system as a extending the maturity to (eventually) 201/ result of the expansion in the money supply, it years, so that the yield was lowered to 4.05 per is not surprising that interest rates showed a cent. Early in January 1941, the coupon rate strong downward tendency which served to min- itself was cut to 31/ per cent, the new notes be- imize the burden of the growing Reich debt. ing issued at 983/4 with a maturity of about 15 A decisive step in the reduction of the gen- years, yielding 3.65 per cent. The coupon rate eral level of interest rates was the lowering of remained unchanged, but the price by the end the discount rate of the Reichsbank from 4 to of 1943 was 991/ and the maturity 22 years, 31/9 per cent on April 9, 1940. The credit insti- giving a yield of 3.58 per cent.1' The same kind tutions followed suit by concluding new interest of security was issued in 1944, but in addition agreements effective May 1, 1940, fixing rates a new type of 31/2 per cent Treasury notes which were on the average about 1/ per cent (Series III) was placed on sale with the special lower than before (see p. 86). The short-term feature that the interest was payable at redemp- interest rate structure has been maintained tion. The bonds were sold at 981/ and mature unchanged since that time. The steady reduc- after 10 years, when the investor is paid 135 per tion in long-term interest rates, as reflected cent. The bonds, which have a yield of 3.23 per in the terms of new Reich issues, has been cent, were made attractive to private investors described in a preceding section. The cou- -by giving certain holders special tax privi- pon rate on the standard borrowing instruments leges on the income derived thereon-and were of the Reich (Treasury notes and Li-loans), devised as a medium-term investment to fill the which had been 41/2 per cent before the war, gap between the short-term Treasury bills and was brought down to 31/ per cent early in 1941. the 22-year Treasury notes. In 1942-44, a series At that time it was officially announced that the of earlier issues at 41 per cent were called and rate on long-term Reich securities would be sta- converted into the 31/ per cent type. bilized at that level, and only minor changes in Li-loans ("liquidity" loans) were issued from the terms of Reich issues have since been made. 2 1935 until April 1940 with an interest rate of Unlike bonds which have to be drawn for repayment, the limited annuity bond has the advantage of requiring no serial num- 41/ per cent, a maturity of 27 years, and an ber, any bond being replaceable by any other. This greatly simpli- fies the collective custody and the application of the system of issue price of 981/4 yielding 4.68 per cent. In transfer by book entry. May 1940, the interest was lowered to 4 per 1 In the winter of 1942-43, for example, private mortgage banks were authorized to issue more than RM 1 billion of mortgage bonds cent and on maturity of 20 years, and early in in order to make loans to owners of property who, by Reich decree. were compelled to discharge their obligation on the annual house 1941, the coupon rate was fixed at 3% per cent. rent tax by making a lump sum payment equal to 10 times the annual tax. The total amount of these payments came to some " Until March 1943, credit institutions received a discount of RM 8 billion but the bulk was financed out of the cash holdings 1/4 per cent from the stated prices and therefore a slightly better of the tax payers or out of loans from institutions which already yield. had a supply of loanable funds. Other institutional borrowers-particularly and the prohibition of virtually all securities those issuing mortgage bonds-have taken ad- transactions outside the exchanges. One notable vantage of the situation by converting their measure by which the rise in share prices was callable bonds to a standard 4 per cent basis. combatted was adopted early in 1942 when in- Through official control of stock market trans- vestors who had acquired large holdings since actions the price of these bonds has been fixed the outbreak of the war were made liable to sell at 1021/2, except that industrial bonds (also them to the Reich upon demand at prices pre- now mostly on a 4 per cent basis) were allowed vailing at the end of 1941. The securities re- to be governed by market forces until the fall quisitioned by the Reich under this decree were of 1943 when a standard market price of 110 administered by the Reichsbank and the Preus- per cent was enforced for these securities. sische Staatsbank as a "manipulation fund", The control of corporate dividends has been from which official sales to the market could be maintained and even strengthened during the made for the purpose of depressing the market war period with the double objective of chan- price. The combined effect of these measures has neling corporate profits directly or indirectly been complete stagnation in the stock market; into government securities and of putting a the general index of share prices, which had damper upon speculation in corporate shares. greatly risen until August 1941, sharply de- The Anleihestockgesetz was replaced in the clined in the last quarter of that year and after middle of 1941 by the so-called Dividenabgabe- a certain recovery remained rather stable in verordnung which subjected dividends exceed- 1942 and completely stagnant in 1943. ing 6 (or in some cases 8) per cent to prohibi- tive progressive taxation. For example corpora- Success in price stabilization tions which in principle were allowed to pay As noted previously, price and rationing con- only 6 per cent and which desired to distribute trols have remained the principal bulwark an 8 per cent dividend had to pay a 100 per cent against inflation of the price level. Many of tax on the excess 2 per cent. As a result of these these controls were introduced in the early provisions the 6 per cent rate became the stand- years of the Nazi regime and have been main- ard dividend rate of the country. The decree tained and developed during the war period. contained certain provisions, however, alleviat- Beginning in 1934, wages were stabilized in ing the position of corporations which had large Germany, for the most part at the 1933 level, hidden reserves and therefore small capitaliza- by freezing the existing wage schedules cover- tion relative to their earning power. Such cor- ing entire trades and industries within a given porations were allowed to increase their capital district or throughout the whole Reich. Al- to a level more accurately reflecting their asset though payrolls increased greatly as a result of position although such capital increases were growing employment, longer hours, and reclas- themselves subject to a special tax. A great num- sification of jobs, the index of hourly wages re- ber of corporations availed themselves of this mained relatively unchanged from 1933 until opportunity. At the end of 1940, there were 1938, and it is believed that no major changes some 28,300 corporations in Germany with an have occurred during the war. Stable wages aggregate capitalization of RM 26.6 billion; were always considered in Germany as a pre- 1,700 companies with a capital of RM 9.8 bil- requisite of price control. lion in 1940 had increased their capitalization to Since 1934, agricultural prices have been 15.2 billion in June 1943. completely regulated at every stage, from pro- This drastic control of corporate profits was duction to the final consumer. The country was not sufficient, however, to check speculation in divided into various regions, within each of equity securities on the stock market. The rising which a uniform price structure has been main- level of share prices is reflected in the official tained. Comprehensive price control was intro- index-on the basis 1924-26=100-which stood duced by the price-stop decree of November 26, at 101.6 in August 1939; the index had reached 1936, which froze prices at the October 18, 1936, nearly 140 by December 1940 and 160 by Sep- level. The price-stop is valid for all products tember 1941. Although, while hopes of German for which no specific price regulations exist and victory were bright, there might have been covers virtually all prices of goods and services, some justification for this rise on the basis of except imports (for which the regulations issued anticipated corporate profits, it became increas- by the import control offices were to remain in ingly clear during 1941-42 that the rise was force) and the security markets. The latter were stimulated mainly by the desire of the investing also frozen as explained above. Price reductions, public to find some hedge against inflation of of course, are encouraged wherever possible, the currency. The German authorities, alarmed and reductions made at one stage of production by this development, adopted increasingly must be carried through to the remaining stringent measures to curb stock market specu- stages. On the other hand, price increases were lation. These measures culminated in the freez- approved when operations under an existing ing of stock exchange prices by official action 14 price ceiling proved to be unprofitable, etc. There has been a tendency to base prices of 14 Share prices were frozen at the level prevailing on January 25, 1943. manufactured goods on the costs of a reason- ably efficient concern, allowing especially low- exchanges seem to be operating in numerous cost producers an efficiency premium. On sev- communities. eral occasions action has been taken to reduce cartel prices. Prices for government orders have Changes in the banking structure a been determined on the basis of "the cost of The most obvious change in the structure of fixed well-run firm." Uniform prices have been German banking since the end of 1938, which on homogeneous articles, either for the whole should be borne in mind in considering any industry concerned (Einheitspreise) or for financial statistics for this period, is the terri- groups of firms classified according to efficiency torial expansion of the Reich. The population of (Gruppenpreise). the Reich, which amounted to 79 million at the All in all, despite some outbreaks of black end of 1938, rose, mainly as a result of the an- market trafficking, especially in foodstuffs, price nexations, to an estimated 93 million 15 in 1941, control appears to be operating successfully. or by 18 per cent. Reichsmark currency was Such success is due to experience gained in the made sole legal tender in the annexed territor- last ten years and to the strict enforcement of ies, and was exchanged against the local cur- the regulations and severe punishment of vio- rency through branches opened by the Reichs- lators. Both the wholesale and the cost of living bank. Similarly, with the expansion of the Ger- indexes published by the Reich Statistical Office man Reichspost, the Postal giro system was have risen steadily but rather slightly, as will introduced in the annexed territories. be seen from the following table: Existing savings banks and credit coopera- Cost of living Wholesale prices tives in the annexed areas were remodeled on Year: (1913=100) (1913=100) the German pattern and integrated with the 1938 .... 125.6 105.7 prevailing in the Reich.16 For savings 1939 .... 126.2 106.9 systems 1940 .... 130.1 110.0 banks, new Girozentralen were established or 1941 ... .133.2 112.3 existing ones remodeled, and similar adjust- 1942 .... 136.6 114.4 ments were made in the Zentralkassen, the re- 1943 .... 138.5 116.3 gional head institutions of the credit coopera- case the national head institu- are subject to important qualifi- tives. In either These figures - the Deutsche Girozentrale - Deutsche In the first place, as openly admitted by tions cations. Kommunalbank, and the Deutsche Zentralge- Nazi writers, the deterioration in the quality of the central in- reflection in the indexes. nossenschaftskasse-remained available goods finds no stitutions of the expanded systems. In the field Secondly, a number of low-priced articles, while the integra- often not available of commercial credit institutions, included in the indexes, are tion of the existing credit facilities with those in the market. Thirdly, the indexes are based for in the Reich was mainly carried out by the entirely on official prices with no allowance (including the Bank der at highly Berliner Grossbanken the turnover of goods in black markets Deutschen Arbeit), which opened branches in inflated prices. However, because of reasonably in Austria and on the the annexed territories or-as adequate supplies of basic commodities, Luxemburg-acquired participations in strong pen- one hand, and long-term prison and death local banks. This penetration of the annexed ter- alties for those who violate the law, on the ritories should not be confused with the pene- other, the extent of traffic should tration of countries which, while not annexed to not be overestimated. the Reich, came under its sway as a result of The acute shortage of goods and the artifi- the military and political events. ciality of present day markets in Germany is In the annexed territories the Reichsgesetz in illustrated by the growth of barter trading fiber das Kreditwesen and other banking legis- used articles on a considerable scale, especially lation was introduced, while credit institutions since the heavy air raids of 1942-43. Bartering became members of the corporative organiza- posts have been set up in many German cities tion of German banking and subject to the im- goods can be brought and where second-hand portant agreements regulating interest rates, traded for other goods of which the owner is in competition, etc. Generally speaking, German more urgent need. The establishment of these statistics do not differentiate any longer be- posts, although originally fostered by the local tween institutions in the Altreich and in the party organizations, drew fire from the mon- annexed territories. In fact, a clear cut segre- etary authorities, particularly Dr. Funk. It was gation would be very difficult in view of the trading might cast discredit feared that barter closely woven net of inter-bank relations which upon the currency as a medium of exchange and, typical of German banking. more specifically, might produce a series of is so While the number of banks and bank branches "barter prices" which would differ from the ex- relative money prices established under the has tended to increase because of territorial German price control system. Despite this au- 15 Not including the Protectorate Bohemia-Moravia, which was allowed16 to retain its own monetary and banking system. thoritative opposition, the obvious merits of In one notable instance, Germany borrowed an institution barter trading under present circumstances in. from an annexed area: after the Anschluss, the Austrian Postal Savings System was expanded into a system for the whole Germany have had to be recognized and barter Reich, although the head office was retained in Vienna. pansion, an opposite tendency has arisen be- nificant changes have occurred in the relative cause of mobilization for total war. Since 1942, size and importance of the various institutions. but particularly since early 1943 after the Sta- As might be expected, institutions specializing lingrad disaster, a movement has been under in the collection of the public's savings have way to close down credit institutions or their especially benefitted from war conditions. branches in order to release manpower and Whereas commercial credit institutions more facilities for service in the war effort. German than doubled their assets from 1938 to 1943, authorities, however, stress that the movement funds mobilized by the savings bank and credit should not be considered as purely a war meas- cooperative systems more than trebled during ure. The German credit system is considered to the same period. The balance sheets of almost be "over-banked"; and so most of the closings, all individual institutions have been inflated, which were planned by the Reichswirtschafts- but in varying degrees, as shown by the table minister in collaboration with the Reichsauf- on the following page covering all institutions- sichtsamt, the Reichsbank, and the Reichs- outside the Reichsbank and its subsidiaries and gruppe Banken, are expected to be permanent. the Rentenbank-which had total assets ex- The greatest curtailment took place among the ceeding RM 1 billion at the end of 1943. Due to Berliner Grossbanken with branches, which are the growth of deposits in the savings bank sec- unpopular in Nazi circles as representatives of tor, the Deutsche Girozentralen-Deutsche Kom- financial power. In the course of the rationali- munalbank, the head institution of the savings zation movement (which was terminated in banks system, now heads the list of these banks. 1943) the Deutsche Bank, Dresdner Bank, and Similarly some of the regional Girozentralen Commerzbank had to close 200 branches and (15, 16, 18, 21, 22, 23, 24, 30) have forged some 160 agencies, corresponding to about 30 ahead rapidly. Due to the accumulation of de- per cent of the original total of bank offices posits with the credit cooperatives, the total maintained by them in 1940. The inroads on assets of the Deutsche Zentralgenossenschafts- the credit cooperatives were also heavy; while kasse (13) in 1943 were more than 11 times as little information is available on the losses of large as in 1938; this institution is now the the rural credit cooperatives, it is known that third largest in the group. The largest savings the number of urban credit cooperatives was bank in Germany is the Sparkasse der Stadt decreased for some 2,000 in 1938 to 1,736 in Berlin (19), the largest credit cooperative the 1943. On the other hand, the effect of the ration- Kreditanstalt der Deutschen, Reichenberg (in alization movement was less serious for the re- the , 29). gional commercial banks, and much less so for Among the Berliner Grossbanken, the Bank the savings banks, which as depositories for the der Deutschen Arbeit (14), enjoying the pa- public's savings play such an important role in tronage of the German Labor Front, has shown war financing. While the three large Berlin the most conspicuous development, its total banks alone lost 360 branches and agencies, all assets at the end of 1943 being 9 times as large the other private credit institutions (mainly as in 1938. The Deutsche Bank, Dresdner Bank, regional banks) lost only 110 branches and 65 and Commerzbank (12, 13, and 15) succeeded agencies. Finally the public savings banks, in. more than doubling their assets, but the which in 1940 had some 15,000 offices of all Reichs Kredit-Gesellschaft (29) and the Ber- categories, lost until the end of 1943 between liner Handels-Gesellschaft (total assets at the 600 and 700 offices. The closing movement was end of 1943-RM 542 million) lagged much brought to an end in 1943 under the impact of behind, largely because of their lack of a the stepped up air attacks on German cities, branch system for the receipt of deposits. which proved the necessity of having a larger Due to the stagnation in mortgage financing number of banking facilities in each city. during the war, regional institutions such as The greatest change in banking supervision the Bayerische Hypotheken-and Wechsel-Bank was the abolishment of the Reichsaufsichtsamt and the Bayerische Vereinsbank (21 and 26), fir das Kreditwesen. In connection with the which combine such financing with commercial more intense mobilization, the agency was dis- banking, grew more slowly than the purely solved in September 1944 and its powers were commercial banks, e.g., the Bayerische Staats- transferred to the Reichswirtschaftsminister bank in Munich, or the Creditanstalt-Bankver- and to the Reichsbankdirektorium. ein in Vienna (22 and 25). The stagnation in Institutional changes have been very few dur- mortgage business is also reflected in the de- ing the war period. No important new banks velopment of Germany's largest pure mortgage have been founded, except as a result of mer- bank, the Deutsche Centralbodenkredit A. G. gers of existing institutions. There has been Berlin (21), which added only a little more some simplification of the structure of public than 10 per cent to its assets from 1938 to 1943. banking by the merger of regional public insti- Other specialized institutions engaged in long- tutions (Girozentralen, State or Provincial term financing in different fields (Deutsche banks, and mortgage banks) into new Gemein- Rentenbank-Kreditanstalt, Deutsche Industrie- schaftsbanken, as in Hessen, Schleswig-Hol- bank, and Deutsche Bau- und Bodenbank- (19, stein, Westphalia, and the Westmark. More sig- 23, 24) all show relatively modest increases. To this group also belong the Bank der Deutschen ments of the credit institutions do not reflect Luftfahrt (not listed in the table), which-in such losses. However, besides disrupting bank- the form of a predecessor institution-was prob- ing operations in general and putting the staffs ably quite a small enterprise in 1938. It had under a heavy strain, the air raids seem to have total assets of RM 1.5 billion at the end of 1941, greatly affected the internal organization of the but no figures are available for later years; its banks. The big Berlin branch banks, which were remarkable development is attributable to its highly centralized, were especially vulnerable close relationship with the Reich Air Ministry. and found it necessary to resort to a greater degree of decentralization. The headquarters of Institutions with Total Assets Exceeding RM 1 Billion some of the big Berlin banks were reported to -1938, 1942, and 1943 Totalasset have been moved away from Berlin, one of Total assets them spreading the majority of its managing Total assets (Million RM) (Per cent, board (Vorstand) over the Reich. In order to 1938=100) Institution insulate the whole organism against damages

1938 I 1942 1943 1942 1943 inflicted upon Berlin, other Berlin institutions moved their loan departments (which-pass on 1. Deutsche Girozentrale-Deutsche Kom- many of the loans granted by the branches) munalbank, Berlin______2,132 9,253 10,286 434 482 2. Deutsche Bank, Berlin______3,748 7,504 8,703 200 232 away from that city. As a further measure of 3. Deutsche Zentralgenossenschaftskasse, decentralization the branches of the big banks Berlin------2,598 4,616 6,751 772 1,129 4. Dresdner Bank, Berlin ------2,785 5,736 6,679 206 240 were ordered to make monetary transfers di- 5. Bank der Deutschen Arbeit-__-____-_ 513 3,681 4,657 718 908 6. Commerabank, Berlin______1,554 3,436 4,240 221 273 rectly to one another instead of through Ber- 7. Rheinisehe Girozentrale und Provin- lin. Moreover, to safeguard the documentary sialbank, Dfsseldorf______781 2,574 3,453 330 442. 8. Girozentrale Sachsen, Dresden______502 2,760 3,392 550 676 basis of bookkeeping and of business transac- 9. Deutsche Verkehrs-.Kredit-Bank A.G._ 787 1,894 3,271 240 416 10. Bayerisehe Gemeindebank (Girozen. tions, the banks made it a rule to forward one trale), Mtnchen__ _ 619 2,011 2,660 325 430 11. Preussische Staatsbank (Seehandlung), carbon copy to archives located in some city Berlin-- 1,195 2,353 2,648 197 222 less exposed to air raids. 12. Mitteldeutsche Landesbank, Girozen- trale, Magdeburg______584 1,945 2,568 333 440 The main effect of the air raids on the banks' 13. Sparkasse der Stadt Berlin______778 2,080 2,560 267 329 14. Deutsche Rentenbank-Kreditanstalt, policy was to cause them to seek a higher degree Berlin~- 1,868 2,060 2,000 110 107 15. Berliner Stadtbank-Girozentrale der of liquidity. Business firms and individuals in- Stadt Berlin------575 1,911 2,395 332 416 creased their own holdings in cash and giro- 16. Bayerische Hypotheken-und Wechsel- Bank, Minchen______1,198 1,818 2,020 152 169 balances with the Reichsbank and the amount 17. Niedersachsische Landesbank-Giro- of demand deposits which they zentrale, Hannover------511 1,197 1,700 234 333 held with other 18. Deutsche Centralbodenkredit A.G., banks, while the latter, in order to prepare for Berlin---- 1,481 1,626 1,650 110 111 19. Bayerische Staateank, Mtlnchen--__ 608 1,270 1,470 209 242 the increased cash demands of their customers, 20. Bcandenburgische Provinzialbank und increased their own cash holdings, Girozentrale, Berlin______299 1,062 1,450 355 485 their giro- 21. Girozentrale der Ostmhrkischen Spar- balances and their investment in short-term kassen, Wien______1,009 1,422 22. Deutsche Industriebank, Berlin_____ 866 1,287 1,408 149 163 Treasury bills, the latter at the expense of long- 23. Deutsche Bau-und Bodenbank___-___ 690 1,308 1,382 190 200 24. Schlesische Landesbank-Girozentrale, term Treasury notes. Breslsu---- 173 957 1,371 553 908 25. Creditanstalt-Bankverein, Wien ___-_ 647 1,165 1,278 180 198 Finally, the emergency caused by the air 26. Bayerische Vereinshank, Munchen ---- 722 1,154 1,228 160 170 raids had the effect of forcing the different 27. Reiehs-Kredit-Gesellschaft A..G Berlin 620 1,055 1,137 170 183 28. Kreditanstalt der. Deutschen, Reich. credit institutions to a higher degree of soli- enherg__~______;__ 1332 707 1,038 213 313 29. Badiache Kommunale Landesbank- dairty and cooperation. Immediately after a Girozentrale, Mannheim------266 740 1,008 278 379 raid the Reichsbank would supply the currency and arrange for mutual assistance among banks 11939 figure.. in meeting payroll emergencies and in honoring checks drawn on any damaged bank. Inasmuch Effects of air raids as German workers are usually paid in cash, To meet the needs of their customers, but the most urgent needs were apparently met by also for reasons of prestige, the most important such measures. The credit institutions further- premises of the credit institutions in Berlin and more entered into agreements which-under in the provincial centers are located in the busi- certain conditions-allowed bombed-out depos- ness centers of the cities. Since 1943, when itors on ,savings account to withdraw from any aerial warfare was stepped up, the banks there- credit institution the savings which they held fore stood in the front line of aerial warfare on deposit in any other institution. Thus sav- and suffered severe losses in the way of build- ings deposits with credit institutions became ings, office-machinery, and furniture. Since the highly mobile and comparable to postal savings Reich is paying for all damage inflicted on the deposits, which may be withdrawn at any post banks and their customers, the financial state- office in the Reich.