A.E. de Beer The German banking crisis of 1931 The German banking crisis of 1931

Bachelor Thesis Finance 300TFI

A.E. de Beer Student Business Studies [email protected] s713981

Supervisor: N.R.D. Dwarkasing BSc.MSc

May 16, 2011

Tilburg University Tilburg School of Economics and Management 3

Preface

The bachelor thesis is an elementary component of the bachelor programme. It gives a good impression of what a student has learned during the past three years. It shows whether a student is capable of constructing a theoretical framework, collecting the right data, performing an analysis and write scientifically about it. Next to that, due to the extensive research, a student getsthe opportunity to gain in-depth knowledge.

Writing a thesis has been a wonderful experience. Sure, you need to apply your skills and gather a lot of knowledge before even starting to write. But, most of all, writing a thesis teaches you much about yourself. You learn whether you acquired the right skills, whether you are capable of solving problems and most importantly, whether you possess some perseverance. You will be occupied with your subject for quite some time, so you had better choose something that intrigues you. And so I did.

This thesis is centred in the area of finance. It concerns events that took place more than 80 years ago, but of which the impact still carries on today. Interwar Germany forms a fascinating period that still needs a lot of additional research. It is in this period that Germany had to recover from the aftermath of World War I, extreme hyperinflation took place, the Great depression cast its shadow over the world and the rise of the Nazi regime changed the image of Germany forever.

This thesis will take a closer look to the German banking crisis in 1931. This subject is widely discussed and researchers still cannot agree on its causes and character. They do however agree on its consequences, which were enormous. Crises of this size are rarely seen and form a very interesting case to investigate. In this thesis the focus will primarily lie on the banks and their survival. Some general information about the crisis will be provided, after which its causes and character will be discussed and then finally the German banks will be the main topic of the analysis.

I hope my thesis lives up to the expectations and wish you as a reader will find it as interesting as I did.

Adriënne de Beer

A. de Beer - The German banking crisis of 1931 4 Management summary

In the aftermath of World War 1 Germany had to pay high reparations to Belgium and France. The exchange value of the Reichsmark fell in 1923 and Germany experienced the greatest infla- tion in history. Since domestic capital was insufficient to meet the demands of private and public institutions during the following stabilization, the economy relied on foreign capital between 1924 and 1928. There were significant problems with this method. Banks lacked good fundamen- tals, which was covered by the foreign capital. Next to that, the Reichsbank also did not force banks to follow more prudent policies.

Foreign capital fled in 1929. Banks lost almost all capital inflow and were no longer able to meet their liabilities. When banks turned to the Reichsbank for loans, it refused to act as a lender of last resort. Many banks went bankrupt. The 1931 German banking crisis was a fact. This thesis explores the 1931 crisis in general and looks into the influence of liquidity of the different types of German banks on their probability of survival of this crisis.

Researchers still not agree on what caused this crisis. There exist many theories. Possible causes include management errors, inadequate central bank policies, close links between banks and in- dustry and contagion from Austria. Some argue the crisis was international in origin, others argue that the crisis was caused by internal German problems.

Next to the disagreement on the cause of the crisis, researchers are also not in consensus on the type of crisis. Some argue that the crisis was a currency crisis, affected by government policies and actions. Others argue that the crisis was a banking crisis as a result of private action affected by fears for the safety of bank deposits. A third explanation is that the crisis was a twin crisis, caused by a run on the currency triggered by domestic political actions.

In this thesis five banking sectors are recognized: savings and loan clearing banks, mortgage banks, credit banks, state banks and large banks. Balance data for each different type of bank is gathered from the period 1924 – 1928 and the period 1930 – 1932. With these balance sheet data aggregated liquidity levels are calculated for each banking sector for each separate year. As a measure of liquidity the quick ratio is used.

The results of this analysis are troubled by inconsistent data. It does appear howe- ver, that aggregated characteristics and liquidity levels of a banking sector influen- ced the impact of the 1931 crisis on that particular sector. A. de Beer - The German banking crisis of 1931 5 Table of contents

CHAPTER 1: INTRODUCTION. 5

CHAPTER 2: LITERATURE REVIEW. 8 CAUSES OF THE CRISIS 8 TYPES OF CRISIS 9 Twin crisis 10 Currency crisis 11 Banking crisis 12 DIFFERENT TYPES OF BANKS 13 Savings and loan clearing banks 14 Mortgage banks 14 Credit banks 14 State banks 15 The great banks 15

CHAPTER 3: ANALYSIS. 17 RESEARCH DESIGN AND DATA COLLECTION 17 RESULTS 18 Balance sheets posts 19 Liquidity ratios in 1924 20 Overview 23 ANALYSIS 26

CHAPTER 4: CONCLUSION AND DISCUSSION. 30 CONCLUSION 30 RECOMMENDATIONS FOR FUTURE RESEARCH 32

REFERENCES 33

APPENDIX 34

A. de Beer - The German banking crisis of 1931 6

Chapter 1: Introduction

In the aftermath of World War 1 Germany had to pay high reparations to Belgium and France. Faced with these enormous reparations and reconstruction costs Germany had to use a considerable amount of its gold reserves. When reserves were almost gone, the Reichsbank – the central bank of Germany from 1876 until 1945, acting as the fiscal agent of the government in receiving and disbursing public money without pay (Holdsworth, 1914) – still kept on issuing unbacked Reichsmarks with which foreign currency could be bought for further repayments. Consequently, the exchange value of the Reichsmark fell in 1923; Germany experienced the greatest inflation in history, with prices risen to one million million times of their pre-war level (Lewis, 2003).

Since domestic capital was insufficient to meet the demands of private and public institutions, the economy relied on foreign capital between 1924 and 1928 (Adalet, 2003). There were significant problems with this working method: Banks did not have good fundamentals such as high capital and liquidity ratios, and these weaknesses were masked by the inflow of foreign capital that enabled banks to continue lending. Adalet (2003) shows that troubled banks would have high levels of short-term foreign deposits, high levels of imprudent lending practices to industry and low levels of capital and liquidity ratios. Banks that were illiquid – caused by the heavily borrowing of foreign short-term capital – were much more vulnerable for shocks and disturbances in the international money market.

Unfortunately, foreign capital fled in 1929. Kindleberger (1973) claims that foreign investors failed to differentiate between Germany and Austria – which was in a severe crisis – which caused investors to withdraw their deposits. Due to the heavily increased competitive environment, banks had not taken the necessary measures to insure themselves against bank runs and neglected to take even the traditional security standards. A measure of this fact is the decline in their liquidity ratios. The credit banks’ ratios of cash and Reichsbank balances to deposits declined from 7,3% in 1913 to 3,8% in 1929 and their ratios of capital and reserves to assets declined from 22% to 7% (Adalet, 2003).

At this point the Reichsbank failed miserably as well; According to Adalet (2003) it did not force banks to follow more prudent policies. Moreover, when banks turned to it as lender of the last resort it chose to maintain the gold standard over domestic economic stability, dooming the world to the horrors of depression (Ferguson et al, 2001). The Reichsbank its statute

A. de Beer - The German banking crisis of 1931 7 required it to maintain a 40% note cover, meaning that the amount of fiat money that circulated in the country had to equal at least the value of 40% of the existing gold reserves. When this ratio was approached, the Reichsbank stopped discounting the bills of the banks (Adalet, 2003). The Reichsbank its discounting facilities had enabled German banks to finance illiquid long-term projects that otherwise would have been considered too risky. This ‘virtually unlimited access’ to the Reichsbank its discounting possibilities was at that point considered as one of the reasons for the extraordinary success of universal banking in Germany (Schnabel, 2004). This was a final blow to the vitality of the German banks. The banks were forced to close as a national banking holiday was declared. They had lost almost all capital inflow and were no longer able to meet their liabilities.

Lack of sufficient regulations had ensured that banks were not forced to maintain safe liquidity ratios, resulting in irresponsible lending practices. This made banks dependent on the Reichsbank; If foreign capital would fled and if the Reichsbank would not be able to act as a lender of the last resort due to the gold standard, banks would be left with their own cash reserves – which were highly insufficient – and would undeniably fail. This was of course, exactly what happened. Many banks went bankrupt. The 1931 German banking crisis was a fact.

Balderston (1994) argues that the ultimate cause of the banking collapse was the inability of banks to replenish their reserves either from foreign loans or the Reichsbank. Adalet (2003) shows that big banks were able to diversify more and suffered smaller losses because they had relatively better access to international markets. One could argue that liquidity and characteristics of a bank played a big role in determining whether a bank was able to cope with the crisis. A study into the liquidity of banks and the relation between liquidity and characteristics could provide some useful insight into the effects of liquidity levels on the impact of the crisis.

It is therefore interesting to take a closer look at the liquidity levels of banks in the period around the crisis. As the foreign capital inflow occurred during the period 1924-1928 and as this was the period of heavy competition between banks, liquidity levels could take interesting forms during these years. As different types of banks with different characteristics could have different motivations to keep certain liquidity levels, it is also interesting to assess whether there were significant liquidity level differences between different types of banks. Next to that, an evaluation of the liquidity levels after the crisis of 1931 might provide some insights into the lessons learned by the banks.

A. de Beer - The German banking crisis of 1931 8

The main research question of this thesis can therefore be constructed as:

What was the influence of liquidity of the different types of German banks during the period 1924 – 1928 on their probability of survival of the German banking crisis of 1931?

This thesis will focus on this problem statement and will work to answering this statement by researching and elaborating the following research questions:

- What role played capital for the German banks during the interwar period? - What were the main differences between the different types of banks in Germany during the interwar period? - Which type of bank tended to survive the German banking crisis? - What did the average liquidity level of each type of bank look like during the period 1924 – 1928?

A. de Beer - The German banking crisis of 1931 9

Chapter 2: Literature review

Causes of the crisis

There is no question about the severity of this crisis. According to Schnabel (2004) the crisis of 1931 hit the German economy with an unprecedented fierceness, at a time when the country was facing a deep recession with more than four million people being unemployed and increasing political tensions, both within the country and in the international sphere. German banks experienced several weeks of heavy deposit withdrawals, impairing their liquidity positions. At the same time, the Reichsbank suffered from reserve losses due to a run on the German currency. The terrible economic climate caused companies trouble and many of them broke down. When Nordwolle, a huge textile company, collapsed, the consequences for its creditors were disastrous. The collapse culminated in the breakdown of Danatbank, the second largest German bank and a huge creditor of Nordwolle. A general banking panic followed, which was only stopped through the declaration of a bank holiday. A little later, the Reichsbank suspended the free convertibility of the Reichsmark into gold and set an end to the gold standard in Germany.

The aftermath of the crisis was severe as well; The crisis provoked an official investigation of the German banking system and led to a first attempt at direct regulation of the commercial banks: the Credit Control Act of 1934 (Pohl, 1994). Out of the six large banks of Berlin, only BHG and RKG could do without public assistance. The crisis gave rise to the creation of a national banking supervision and to a tightening of banking regulation, including rules on large exposures and liquidity and the formation of a binding interest cartel (Schnabel, 1994). Capital flows remained restricted for years, and the full convertibility of the currency was not reached until long after the war (Schnabel, 2004).

It still remains unclear however, what exact cause sent German into this misery. The consequential disasters – the collapse of the Weimar Republic and the Nazi seizure of power – make it easy to perceive disaster lurking everywhere (Ferguson et al, 2001). Germany experienced a turbulent interwar period, which makes it very difficult to distinguish a separate factor that is responsible for the crisis. Many researchers have theorized about possible causes. These include management errors (banks depending on a small number of big clients), inadequate central bank policies (the lack of regulation and the failure of the Reichsmark as lender of the last resort), the close links between banks and industry (the universal character of the banks) and contagion from Austria (Adalet, 2003).

A. de Beer - The German banking crisis of 1931 10

Kindleberger (1986) argues that the German crisis was international in origin and mostly concentrated in banks. He thinks the Austrian financial difficulties in May 1931 are the primal cause ofthe German crisis, as this ‘Austrian contagion’ spread out over Europe and let to runs on the banks of Hungary, Czechoslovakia, Romania, Poland and Germany. His view focuses on the consequent problems of the German banks – not the German budgetary problems – and sees the failure of Nordwolle as the culminating point of the German crisis in 1931. Adalet (2003) adds to this view that foreign creditors failed to differentiate between Germany and Austria; The two countries had similar banking structures and both showed symptoms of possibly going off the gold standard by imposing exchange controls. Creditors lost their confidence and withdrew their deposits.

James (1986) thinks the crisis was caused by internal German problems. He argues that the German banks had structural weaknesses and were fundamentally unsound, ultimately resulting in the bank run. International aspects did matter, but the primal cause of the crisis was the imprudent banking structure. The withdrawal of the foreign deposits was just the last small push that led the German banks over the edge into the crisis. Banks had brought this crisis onto themselves by tolerating capital flight in and by mismanaging their debt.

Balderston (1994) acknowledges the presence of both a banking and currency crisis and separates them in his explanation of the cause of the German crisis. He argues that the ultimate cause of the banking collapse was the inability of the German banks to replenish their reserves either from foreign loans or the Reichsbank. The root cause of the crisis lies in the inability of German banks to borrow abroad, for only in that case did they go to the Reichsbank (Ferguson et al, 2001). However, these problems would not have arisen if the general run on bank deposits due to conflicts over reparations and fiscal crises would not have happened. Therefore, as Balderston (1994) states, the crisis was due both to international and domestic problems.

Types of crisis

It is clear researchers do not agree on the exact cause of the German crisis in 1931; Many explanations are possible. It is most likely that each and every single factor – domestic and foreign, banking and governmental, economic and political – contributed its share (Ferguson et al 2001) to make this crisis one of the severest in history. Another point on which researchers do not agree is the type of crisis that occurred. There are three types of crises that can occur: a banking crisis, a currency crisis or a twin crisis. This section will elaborate on them.

A. de Beer - The German banking crisis of 1931 11 Twin crisis Many researchers acknowledge that the German crisis was a twin crisis, in the sense that there was both a currency and a banking crisis. A currency crisis is national, affected by government policies and actions; a banking crisis is the result of private actions affected by fears for the safety of bank deposits. The German crisis of 1931 was a twin crisis caused by a run on the currency triggered by domestic political actions. Banks failed and the international economy constrained Germany (Ferguson & Temin, 2003).

The German crisis is frequently said to have started on 11 May with the publication of huge losses at “Österreichische Creditanstalt,” the largest and most renowned Austrian bank, and the following runs on Austrian banks. In the following two months, bad political and financial news chased each other (Schnabel, 2004). Schnabel (2004) consequently argues that the crisis can be labeled as a currency crisis because political shocks destroyed the confidence of investors in the stability of the Reichsmark and in the ability of Germany to cope with its foreign debt. This resulted in a run on the German currency and severe capital outflows and therefore in large deposit withdrawals at German banks.

When the Reichsbank aborted its discounting facilities – and with that stopped discounting the bills of German banks – and refused to act as a lender of last resort in July, the liquidity risk of all banks rose. The lack of liquidity support triggered the collapse of the Danatbank; The banking panic was complete. Schnabel (2004) shows that the banking type of crisis argument entails that investors feared for the safety of their bank deposits. The collapse of Danatbank had frightened them and they had no confidence in the liquidity and solvency levels of the German banks any more. Consequently, investors withdrew their deposits. As the Reichsbank had stopped discounting their bills and was no lender of the last resort any more, the banks had nowhere to go.

Schnabel (2004) argues that because the currency and the banking problems occurred almost at the same time, it is difficult to decide whether the deposit withdrawals at German banks were merely the consequence of the run on the Reichsmark, or whether the withdrawals of deposits were caused by fears about banks’ solvency and liquidity, encouraging investors to transfer their capital to other countries. To get a full understanding of both the currency crisis argument and the banking crisis argument it seems wise to explore them both in more detail.

A. de Beer - The German banking crisis of 1931 12

Currency crisis Currency crises are national and affected by government policies and actions. Schnabel (2004) shows that proponents of the currency type explanations of the German crisis blame the political disturbances in the beginning of June for the exhaustion of reserves at the Reichsbank. In addition, Ferguson et al (2001) argue that the German crisis of 1931 was domestic in origin and that the failure was indeed more political than economic. They blame the German government, which in 1931 found itself in an impossible position as the recession of the late 1920s deepened and its budget went into deficit.

Next to that, Ferguson et al (2001) show that there is no evidence of international contagion from the Austrian crisis. Investors did not panic because of the Austrian problems, they panicked because of the latest manifestation of Germany its long running fiscal crisis. This fiscal crisis threatened to run out of control and was leading towards the postponement and default on both Germany its foreign currency and domestic debts. Consequently, when Heinrich Brüning – chancellor of the Weimar Republic at that time – announced that Germany could pay no more reparations, a run on the Reichsmark came into motion that caused banks to fail. This run was on the Reichsmark, not on the banks and the fear was that the German government, not the ‘Grossbanken’, would not be able to pay their bills. This caused investors to withdraw their deposits en masse.

That the German banks failed in 1931 is a fact. However, this could only occur because the government put them under unbearable strain. There is little evidence of structural problems among German banks or fear for their stability. That is, before the statements of the government raised fears for the value of the Reichsmark (Ferguson et al, 2001).

It is true that political shocks and the fiscal crisis shattered investors their confidence in the stability of the Reichsmark and in Germany’s ability and willingness to service its foreign debt. It is true that this led to a run on the German currency and consequently to strong capital outflows, resulting into deposit withdrawals at German banks (Schnabel, 2004). However, Schnabel (2004) shows that this alone cannot explain the occurrence and the severity of the crisis. The political crisis was accompanied by severe problems in the banking sector that were independent of the currency disturbances; The risky business policies of the great banks – imprudent lending practices and low liquidity levels – triggered deposit withdrawals and provoked further capital outflows. One could argue that a currency crisis occurred in Germany which contributed to or even severed the banking crisis that followed. It is therefore very important to take both the currency crisis as the banking crisis accounts into consideration.

A. de Beer - The German banking crisis of 1931 13

Banking crisis There were so many economic and political uncertainties during this interwar era that many factors might have contributed to the collapse of the banking system. One thing that is sure is that the structural weaknesses such as low capital and liquidity contributed to the intensity of the crisis. Nowadays research emphasizes the importance of capital requirements for bank stability and required minimum liquidity ratios are now bounded by law. Capital serves as an insurance against loan default and thus as a buffer against bank failure (Adalet, 2003).

In interwar Germany the Reichsbank advised on healthy liquidity ratios but did not oblige banks to maintain any rate. In the period of 1924 – 1928 the inflow of foreign capital rendered the banks overconfident as they continued to hand out loans. World War 1 and the hyperinflation had led to a competitive environment that prevented banks from restoring their capital ratios to their pre-war levels. Banks lent carelessly to fight the decline in their business in the post-inflationary period which decreased the quality of their assets and liquidity. Industry lending restored to the pre- war level while the decline of the level of capital during the hyperinflation was not replaced and average cash liquidity of Berlin banks sunk to 3,8% of deposits and acceptances compared to 7,3% in 1914 (Adalet, 2003).

During the period 1924 – 1928 the foreign capital inflow increased the liquidity levels somewhat but brought with it some important pitfalls; These foreign deposits were usually short-termed, while they were used to finance long-term lending behaviour. Next to that, foreign capital is very sensitive to disturbances in the international economic climate. These facts meant that if trouble would come along and commotion would rise in the economic climate, foreign capital could disappear as quickly as it came along. That was exactly what happened; The publication of huge losses at the largest Austrian bank raised fears of similar weaknesses in Germany due to the similarity between the Austrian and the German banking systems (Schnabel, 2005). Furthermore, the collapse of large German companies raised speculation about its creditors, the German banks. These developments heavily contributed to the outflow of foreign capital after 1928.

The Reichsbank did not have the power to control the banks by preventing the flow of foreign funds or by improving the fiscal position of the Reich, although the Reichsbank was aware of the dangers of both. There were no bank regulations stipulating the amount of capital, required cash reserves or guidelines for proper activities of banks (Adalet, 2003). Moreover, as mentioned earlier, the Reichsbank also failed to act as a lender of last resort when banks turned

A. de Beer - The German banking crisis of 1931 14 to it for liquidity; The bank chose to maintain the gold standard over domestic economic stability, dooming the banks to collapse (Ferguson & Temin, 2003). The attempts of the Reichsbank to express its concerns by warning banks for their low liquidity rates or the requirement for banks to monthly produce their balance sheets to provide more transparency for the public, were too weak; The Reichsbank failed to secure the financial position of the German banks.

Concluding, from the ‘banking type’ perspective there were four factors that ultimately led to the collapse of banks during the German crisis of 1931; First, due to the increased competitive environment banks continued to hand out loans regardless of their liquidity levels. Second, banks relied on foreign capital to finance their lending behaviour, despite the fact that this kind of capital is very vulnerable for shocks in the international market. Third, the Reichsbank remained ignorant and failed to establish or advise on required liquidity ratios, so banks did not concentrate at keeping high levels. Even more, the Reichsbank refused to act as a lender of the last resort when banks were in desperate need of liquidity. Fourth, depositors preferred short-term deposits over medium- or long-term deposits which enabled foreign investors to withdraw their capital within an eye-blink.

Different types of banks

DDuring the interwar period, Germany knew a number of different types of banks. The German banking sector was dominated by the great banks in Berlin, which accounted for more than 20 percent of the banking sector’s total balance sheet in the 1920s. Another important group were the public banks, namely the savings banks as well as the Staatsbanken, Landesbanken, and Girozentralen, which together held more than one-third of the banking sector’s total assets. The mortgage banks had market shares of around 10 percent, the private bankers of 6 percent. The rest consisted mainly of provincial and other credit banks (Schnabel, 2004).

So we can identify the following list of different types of German banks during the interwar period: savings and loan clearing banks (Girozentralen), mortgage banks (Hypothekenbanken), credit banks (Kreditbanken), state banks (Staats und Landesbanken) and the great banks. This section will elaborate on them.

Nowadays all German banks are Universal Banks. This means that these banks include investment services in addition to services related to savings and loans (“Investopedia”, n.d.). Before the hyperinflation in the early 1920s only credit banks were Universal Banks. The other type of banks specialized in a certain area.

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Savings and loan clearing banks During the hyperinflation banking laws were changed and savings banks became universal banks, performing short-term current account business, mortgage finance and security issue and trading (Pohl, 1994). The effects of these regulations became apparent after the hyperinflation when competition tightened and savings banks became more equal competitors of the commercial banks. Savings banks were now allowed to accept deposits like credit banks, increasing the competition in the banking sector. (Adalet, 2003).

After banks had stabilized from the hyperinflation the number of banks exceeded that of the pre-war era except for savings banks. The period of inflation hit the savings banks even harder than the great banks, at least from the perspective of total assets held (Pohl, 1994); As a result of hyperinflation savings banks lost about 90% of their assets. Next to that, savings banks were hit hard because they had mainly long-term deposits; savings deposits shrank from 64% to 11% of their liabilities (Adalet, 2003).

The savings banks had their own central institutes, the Girozentralen, which managed the savings banks’ mandatory liquidity reserves, served as central clearing organizations, and helped in the provision and investment of funds (Schnabel, 2004).

Mortgage banks Mortgage banks were also hurt by the hyperinflation because their assets, which were mainly long maturity mortgages with fixed interest rates, enormously lost value; Just as with the savings banks mortgage banks lost about 90% of the value of their assets (Adalet, 2003). Although the mortgage banks never regained their pre-war prominence, they were less affected by the 1931 crisis than other types of banks due to the long term nature of their assets and liabilities; Because loans and deposits are set down for a long time with fixed interest rates capital does not flee as easily as at the other types of banks.

Credit banks Credit banks were the first Universal Banks and had close ties with industry. They were universal in the sense that they would arrange mergers and acquisitions, underwrite stock and bond issues, trade securities and offer brokerage services. As a result of hyperinflation credit banks lost half of their assets and the market share of credit banks and credit cooperatives increased sharply after the inflation. (Adalet, 2003).

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Credit banks were hit the hardest during the crisis of 1931. These banks were willing participants in the new system of foreign credit; They combined deposit and investment activities and were more sensitive to stock market fluctuation than other types of bank after the hyper-inflationary period (Adalet, 2003).

State banks The state banks belonged directly to the German states. During the hyperinflation banking laws were changed and state banks such were also able to lend at low, eventually even at effectively negative rates of interest (Pohl, 1994). Clients of the state banks consisted mainly of public non- banks and public or private banks. Only at the public banks, the business with public entities played a significant role (Schnabel, 2004).

The great banks There is strong evidence that large banks had a higher probability of survival and somewhat weaker evidence that this translated into lower deposit withdrawals. The big Berlin banks were able to diversify more and suffered smaller losses because they had relatively better access to international markets and short term assets (Adalet, 2003). Next to that, large banks were more likely to be bailed out and they received preferential access to the Reichsbank’s discount window.

This supports the view that large banks were considered to be ‘too big to fail’ (Schnabel, 2005). This principle implies that a certain business is so important for a nation, that it would be disastrous if it was allowed to fail (“Too Big to Fail”, n.d.). There is also some evidence that depositors anticipated the bail-outs and were therefore less inclined to withdraw their deposits from larger banks (Schnabel, 2005). For these reasons large banks were more likely to survive the banking crisis than were small banks. Large banks were very well aware of this. Research of Schnabel (2005) shows that liquidity ratios are negatively correlated with the banks’ size, which may suggest that the large banks themselves anticipated a privileged treatment at the discount window. By attracting high levels of foreign debt, while holding low liquidity levels, these large banks may have increased the vulnerability of the German economy to a banking crisis. Smaller banks had to hold relative larger levels of liquidity. Holding the same low levels of liquidity as the large banks did would bring far more risk upon them. They did not share in the luxury the large banks had, for they would not be bailed out if they were to default on their loans. Large banks did not take the risks of low capital into consideration – they felt secure by the presumed governmental back-up – which ultimately really deepened the crisis.

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Consequently, the guaranteed support of the Reichsbank for these ‘too-big-to-fail’ banks gave rise to problems of moral hazard. With respect to liquidity, the moral-hazard problem arose directly from the implicit liquidity guarantee of the Reichsbank (Schnabel, 2004). The increased competition after the hyperinflation intensified the moral hazard problems. Risk-taking behaviour by irresponsible lending practices was particularly high at large banks. They were known to extend loans large enough to lead the bank into distress in case of default. Schnabel (2004) mentions a famous example of the Danatbank, which extended a loan of 48 million Reichsmark to Nordwolle. This corresponded to 40% of Danatbank its equity. Next to that, the monitoring of these banks was poor as well. Schnabel (2004) describes the example of the Deutsche Bank, which was involved in a series of financial scandals in the middle of the 1920s, which started the public discussion on whether the Deutsche Bank was paying enough attention to monitoring its debtors.

The great German banks at the time of the crisis in 1931 were the following: The Deutsche Bank & Disconto Gesellschaft, the Danatbank, the Dresdner bank, the Commerz- und Privat-Bank, the Reichs-Kredit-Gesellschaft and the Berliner-Handels-Gesellschaft.

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Chapter 3: Analysis

Research Design and Data Collection

It is clear from the previous section that there are as many plausible arguments to defend the explanation that the German crisis of 1931 was a currency crisis as there are arguments to defend the that the crisis was a banking crisis. Anyhow, it remains sure that the German banks knew many structural weaknesses due to the intense competition that had resulted after the hyperinflation in the early 1920s. Their imprudent lending behaviour and their low liquidity rates intensely deepened the crisis. Banks barely or did not survive the run on the Reichsmark that caused many foreign investors to withdraw their deposits. Ferguson et al (2001) even argue that although a currency crisis was unavoidable, the banking crisis could have been prevented. The government should have handled matters differently.

Next to that, the different structures of the different types of banks are very interesting. Some types of banks had closer ties with industry and were therefore more dependable on the success of businesses. Some types experienced a tighter competitive environment than others and therefore felt complied to engage in more imprudent lending practices. If they would not provide a certain loan, others would. Large banks were backed up by the government, so they felt free the engage in even riskier lending behaviour and maintaining ridiculous low liquidity levels.

This section is going to explore how the inflow of foreign capital during the period 1924 – 1928 influenced the liquidity levels of banks and if these levels changed shortly before, duringand after the crisis (during the years 1930, 1931 and 1932 respectively). These liquidity levels will be calculated for the different types of banks. A comparison between liquidity levels and characteristics will be made to investigate whether the type of a bank determined its liquidity level (and therefore contributed to its risk taking behaviour).

The empirical data for calculating the various liquidity levels will be gathered from a number of balance sheets of the German banks. These balance sheets can be found in the Statistisches Reichsamt: Statistisches Jahrbuch für das Deutsche Reich for each year that needs to be explored. Data will be gathered from the period 1924 – 1928 and the period 1930 - 1932 for each different type of bank.

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After this collection of empirical data, the various liquidity levels of each bank during the previous mentioned years will be calculated. As a measure of liquidity I will use the quick ratio:

Quick Ratio = Cash + Marketable Securities + Account Receivable (net) / Current Liabilities

The quick ratio measures the amount of the most liquid current assets to cover current liabilities. It gives an idea of the ability of the company to meet its short-term liabilities with its short-term assets. The higher the ratio, the more liquid the position.

Many companies also use the current ratio as a measure of liquidity. The main difference between the quick ratio and the current ratio is that the current ratio includes inventory with current assets. Considering that a bank is an institution that provides services, it holds no inventory. Therefore a current ratio would not be relevant in this case.

When the levels of liquidity are calculated, several comparisons will be made. First, the liquidity levels of each type of bank will be compared with its characteristics and its probability of survival of the crisis. This information will tell us whether banks that kept higher levels of liquidity (for various reasons) were indeed more likely to survive the German crisis of 1931. Second, a comparison of the liquidity levels during the period 1914 – 1928 with the liquidity levels of the years 1930, 1931 and 1932 will be made. This way it is possible to investigate whether banks became aware of the importance of liquidity and whether the crisis changed their liquid behaviour or not. Third, the correlation between the number of banks in a sector and the liquidity of that sector over time will be calculated to see if there is a connection. A lower number of banks could imply that banks defaulted and it might be useful to investigate if this is in connection with lowering liquidity ratios.

Results In this section the liquidity ratios will be presented, calculated per banking sector per year. The ratios are calculated for state banks, savings and loan clearing banks, mortgage banks and credit banks over the period 1924-1928 and 1930-1932.

Calculating these ratios was not very easy because the structure and the accounts of the balance sheets often differed between years and between banking sectors. A large problem lies with the transition of the year 1927 to the year 1928. For an unknown reason the German banks maintained the same balance sheet structure for the year 1924 – 1927 and a

A. de Beer - The German banking crisis of 1931 20 complete other structure for the year 1928 – 1932. This causes a great leap in results from the year 1927 and results from the year 1928. Next to that, the balance sheets also contained a number of dated accounts that are no longer used and for which it was sometimes difficult to comprehend what they entailed. These factors might influence the accuracy of the ratios. However, the procedures used to calculate them remains consistent during this research so that the results are comparable.

In most cases balance sheets dated from the end of the year (31/12) are used. However, in some cases the balance sheets were only available from 31/10 or 28/02. In these cases the data used therefore differ two months. When such ratios are calculated the heading will be marked with a ‘*’.

In order to calculate the quick ratio all current assets (minus inventory) have to be divided by current liabilities. As banks have no inventory all current assets of the balance sheet can be taken into account. The formulas used to calculate the quick ratio will differ per sector, for each type of bank has other accounts on its balance sheet.

In this section, first all posts used to calculate the quick ratio are shortly explained. Second, the complete tables and calculations for the year 1924 are shown. Third, because this thesis would become unclear when calculations for all years were as extensively shown as for the first year, shortened tables are included that give a whole overview of all results. The complete tables and calculations can be found in the appendix.

Balance sheet posts Below, in table 1 and table 2, all posts that are used throughout the analysis to calculate the quick ratio (all current assets and liabilities) are mentioned and shortly explained. Table 1: Balance sheet posts: Current assets Current assets Kasse, fremde Geldsorten und Coupons Cash Guthaben bei Noten- und Abrechnungsbanken Accounts receivable from other banks Wechsel und unverzinsliche Schatzanweisungen Marketable securities: securities and treasury bonds Nostroguthaben bei Banken und Bankfirmen Accounts receivable from other banks Reports und Lombards gegen börsengängige Stock exchange securities. Wertpapiere

A. de Beer - The German banking crisis of 1931 21

Eigene Wertpapiere Marketable securities, the bank stocks. Schuldner in laufender Rechnung Debtors with an account, claimable. Darlehen gegen Unterpfand (täglich Warranted loans, claimable at any moment. rückforderbar) Debitoren Accounts receivable from debtors. Effekten Marketable securities, stocks and shares that can be traded. Hypotheken Marketable securities, mortgages that can be traded. Kommunal-Darlehen Loans to public sector entities, tradable.

Table 2: Balance sheet posts: Current liabilities Current liabilities Gläubiger Accounts payable to creditors. Akzepte und Schecks Notes payable. Aval- und Bürgschaftsverpflichtungen Obligated bill guarantees. Guthaben von Banken Debts to others banks. Kreditoren Accounts payable to creditors. Pfandbriefe Mortgage bonds, covered bonds secured by mortgages (on the asset side of the balance sheet), claimable by creditors. Kommunalobligationen Public sector bonds, secured by the Kommunal- Darlehen posts (on the asset side), claimable by creditors. Darlehen der Rentenbank-Kreditanstalt Loans payable to the Rentenbank-Kreditanstalt, a central financing institution. Sonstige Passiva Other payables

Liquidity ratios in 1924

State banks* On 28/02/1925 there were 9 state banks in Germany. Table 3 shows the accounts that are considered as current assets and current liabilities:

A. de Beer - The German banking crisis of 1931 22 Table 3: Aggregated current assets and liabilities of state banks over 1924 Staats- und Landesbanken 28/02/1925, in millions of RM

Current Assets Current Liabilities

Kasse, fremde Geldsorten und Coupons 3,6 Gläubiger 550,7

Guthaben bei Noten- und 5,4 Akzepte und Schecks 3 Abrechnungsbanken Wechsel und unverzinsliche Aval- und 203 3,3 Schatzanweisungen Bürgschaftsverpflichtungen Nostroguthaben bei Banken und 58,5 Bankfirmen Reports und Lombards gegen 57,9 börsengängige Wertpapiere

Eigene Wertpapiere 9,7

Schuldner in laufender Rechnung 220,8

In 1924 the aggregated quick ratio of the state banks equaled current assets / current liabilities = 1,003.

Savings and loan clearing banks On 31/12/1924 there were 11 savings and loan clearing banks in Germany. Table 4 shows the accounts that are considered as current assets and current liabilities:

Table 4: Aggregated current assets and liabilities of savings banks over 1924 Girozentralen 31/12/1924, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und 6,1 Gläubiger 581,9 Zinsscheine Guthaben bei Noten- und 13,2 Akzepte und Schecks 1,1 Abrechnungsbanken

A. de Beer - The German banking crisis of 1931 23 Schecks, Wechsel und unverzinsliche 82,7 Schatzanweisungen Guthaben bei Banken und Bankfirmen 90,6 Darlehen gegen Unterpfand (täglich 21,2 rückforderbar) Eigene Wertpapiere 7,8 Außenstände in laufender Rechnung 230,9

In 1924 the aggregated quick ratio of the savings and loan clearing banks equaled 0,776.

Mortgage banks On 31/12/1924 there were 42 mortgage banks in Germany. Table 5 shows the accounts that are considered as current assets and current liabilities:

Table 5: Aggregated current assets and liabilities of mortgage banks over 1924

Hypothekenbanken 31/12/1924, in 1000 RM Current Assets Current Liabilities Kasse usw 19173,4 Guthaben von Banken 17849,8 Wechsel 22279 Kreditoren 147700,3 Guthaben bei Banken 42576,3 Pfandbriefe 292846,1 und Bankfirmen Debitoren 179310,2 Kommunalobligationen 61732,6 Effekten 33848,4 Darlehen der 0 Rentenbank- Kreditanstalt Hypotheken 354324,6 Akzepte und Schecks 5065,9 Kommunal-Darlehen 61918,6 Sonstige Passiva 182916

In 1924 the aggregated quick ratio of the state banks equaled 1,008.

Credit banks First, the aggregated quick ratio of the credit bank sector will be calculated. Second, the quick ratio of only the big credit banks will be calculated. The big credit banks are defined by having a capital stock larger than 20 million Reichsmark. On 31/12/1924 there were 387 credit banks and 17 big credit banks in Germany. Table 6 shows the accounts that are considered as current assets and current liabilities:

A. de Beer - The German banking crisis of 1931 24 Table 6: Aggregated current assets and liabilities of credit banks over 1924 Kreditbanken 31/12/1924, in 1000 RM Current Assets Aggregated Large Banks Current Liabilities Aggregated Large Banks Kasse usw 418817,2 345764,1 Guthaben von 745923,7 681913,4 Banken Wechsel 1537764,4 1338553,3 Kreditoren usw 5086639,2 4080181,1 Guthaben bei Ban- 1033159,9 883222,2 Pfandbriefe 16530,7 0 ken und Bankfir- men Debitoren usw 3400417,8 2610699,9 Kommunalobliga- 0 0 tionen Effekten 243596,3 155776,8 Akzepte und 60654,3 42717,2 Schecks Hypotheken 17114,9 0 Sonstige Passiva 111070 34899,6

In 1924 the aggregated quick ratio of the credit banks equaled 1,105. The quick ratio of the big credit banks equaled 1,102.

Overview

Below an overview of all quick ratios and number of banks per sector over the years can be found. The tables are accompanied with graphs that visualize the results. As said earlier, calculating these ratios was not very easy because the structure and the accounts of the balance sheets often differed between years and between banking sectors. A large problem lies with the transition of the year 1927 to the year 1928. For an unknown reason the German banks maintained the same balance sheet structure for the year 1924 – 1927 and a complete other structure for the year 1928 – 1932. This causes a great leap in results from the year 1927 and results from the year 1928. Due to this leap it makes more sense to analyze the period 1924 – 1927 separate from the period 1928 – 1932. However, this does not hold for the mortgage banks. The results of this sector do not make this leap during these two periods and are therefore comparable. Moreover, there were no balance sheets to be found of the credit banks during the period 1928 - 1932; It is for this reason that results of this sector during this period are missing.

Number of banks Due to the above mentioned reasons the overviews below distinguish two separate periods. In table 7 and 8 the number of banks per year is shown. These tables are accompanied with a graph.

A. de Beer - The German banking crisis of 1931 25

Table 7: Number of banks during the period 1924 - 1927. 1924 1925 1926 1927 State banks 9 20 21 21 Savings and loan clearing banks 10 11 12 12 Mortgage banks 37 37 38 38 Credit banks (aggregated) 494 502 488 479 Credit banks (large banks) 17 17 17 17

Number of banks per year

600

State banks 500

Savings and loan 400 clearing banks Mortgage banks 300

200 Credit banks (aggregated) Number of banks 100 Credit banks (large banks) 0 1924 1925 1926 1927 Year

Table 8: Number of banks during the period 1928 - 1932.

1928 1930 1931 1932 State banks 9 9 9 9 Savings and loan clearing banks 33 32 32 32 Mortgage banks 39 33 33 32 Credit banks (aggregated) Credit banks (large banks)

Number of banks per year

45

40

35

30 State banks

25 Savings and loan clearing banks 20 Mortgage banks 15 Number of banks of Number 10

5

0 1928 1930 1931 1932 Year

A. de Beer - The German banking crisis of 1931 26

Quick ratios In table 9 and 10 the quick ratio per banking sector per year is shown. These tables are accompanied with a graph. Table 9: Quick ratios per banking sector during the period 1924 - 1927. 1924 1925 1926 1927 State banks 1,003 1,004 0,871 0,953 Savings and loan clearing banks 0,776 0,820 0,719 0,738 Mortgage banks 1,008 1,009 0,941 1,015 Credit banks (aggregated) 1,105 1,086 1,106 1,002 Credit banks (large banks) 1,102 1,077 1,086 0,987

Quick ratio per year

6

Credit banks (large banks) 5

Credit banks (aggregated) 4

3 Mortgage banks

Quick Quick ratio 2 Savings and loan clearing banks

1 State banks

0 1924 1925 1926 1927 Year Table 10: Quick ratios per banking sector during the period 1928 - 1932. 1928 1930 1931 1932 State banks 0,988 0,983 0,960 0,984 Savings and loan clearing banks 0,923 0,902 0,889 0,928 Mortgage banks 1,096 1,142 1,045 0,990 Credit banks (aggregated) Credit banks (large banks) Quick ratio per year

1,2

1

State banks 0,8

0,6 Savings and loan clearing banks

Quick Quick ratio 0,4 Mortgage banks

0,2

0 1928 1930 1931 1932 Year A. de Beer - The German banking crisis of 1931 27 Analysis

In this section the results will be analyzed. Below, each banking sector will be elaborated upon. Due to the previous mentioned gap in data between the year 1927 and 1928 the periods 1924 – 1927 and 1928 – 1932 will be discussed separately for the state banks and the savings and loan clearing banks. The differing nature of the balance sheets of these periods makes the data incomparable. This does not hold for the mortgage banks. Next to that, it was not possible to find any data concerning balance sheets of credit banks dating from the years 1928, 1930, 1931 or 1932. It is therefore not possible to analyze the credit bank sector during the crisis years.

State banks State banks belonged directly to the German states and were therefore very unlikely to default. When you look at the number of state banks, it strucks that the number makes an enourmous leap between the years 1924 - 1925 (the number of banks rises in one year from 9 to 20 banks). However, this is due to a data distortion. The balance sheets that are used for this research come from statistic yearbooks of Germany. It was not possible to find the aggregated balance sheet of the state banks of 1924 in the yearbook of 1925. Surprisingly, this information did appear in the yearbook of 1927. It was therefore used to analyze state banks in 1924. It appears that this balance sheet was structured in the same way the balance sheets are structured in the period 1928 - 1932. It is for this reason that the balance sheets of the years 1924 and 1928 - 1932 show the number of banks in the same system as do the balance sheets of the years 1925 - 1927. So, during the stabilization and even in times of the banking crisis the number of state banks remained fairly consistent.

The quick ratio shows a gradual decline over the years. Especially in the second period (1928 – 1932) the moment of crisis is visible; The quick ratio hovers around 0,98, but suddenly drops in 1931 to 0,96. Consequently, in 1932 when Germany is in recovery, the quick ratio climbs back to its previous status and equals 0,98 again. Although the difference of 0,2 is not very significant, it distinguishes the moment of crisis well.

However, even though the moment of crisis is visible in the results, it looks like the German state banks were not hit very hard by the banking crisis; The number of banks is consistent over time and the quick ratio does not decline dramatically. Literature indicates that this type of bank did not collapse because they were owned by the states; States will not let state banks collapse, because it is disastrous for their economies. It is therefore safe to say that these results and literature correspond with each other. A. de Beer - The German banking crisis of 1931 28

Savings and loan clearing banks When looking at the number of savings and loan clearing banks it is clear that this number is gradually increasing during the period 1924 – 1928. In 1931, the year of the banking crisis, a savings bank is lost, but in general the number of banks remains fairly consistent during the second period.

The quick ratio sharply decreases during the period 1924 - 1928. In the first part of the period it hovers around 0,8, but quickly declines to circle around 0,73 in the second part of the period. During the second period, the quick ratio declines as well. Again, the crisis is clearly visibly at 1931. In 1932, after the crisis, the ratio climbs back to its previous status. Although the ratio declines during the year preceding the crisis and during the crisis itself, it is again not a dramatic decline (the numbers only differ about 0,03).

Literature describes how the competition between savings banks intensified during the years after the hyperinflation (during the years 1924 – 1928). This intensified competition implied that banks would use the new acquired foreign capital to engage in more lending practices. These practices drove liquidity down. This is exactly what we see happening in the results here. In the period that competition intensified, we see an increase in the number of banks and a clear decrease in the quick ratio.

The savings banks had their own central institutes, the Girozentralen, which managed the savings banks’ mandatory liquidity reserves. These established mandatory liquidity reserves might have saved the savings banks from a lot of harm. Although the quick ratio decreases more during the years of the banking crisis than did the ratio of the state banks, the impact of the crisis was not severe for savings banks. With that, the facts in the literature and the presented results here again confirm each other.

Mortgage banks When looking at the number of banks in the sector a significant increase is visible during the period of stabilization (1924 – 1928). In the years hereafter however, the number of banks drops enormously with six banks disappearing from the radar.

During the hyperinflation mortgage banks lost about 90% of the value of their assets. This was a huge blow for this sector. In the following years of stabilization and

A. de Beer - The German banking crisis of 1931 29 inflow of foreign capital, the sector recovered. The increasing number of banks in the first period are in line with the mentioned recovery of the sector. The disappearance of six banks could be due to the outflow of foreign capital and the succeeding banking crisis.

The quick ratios however, appear to show no sign of the crisis at all; The ratio hovers around 1,00 at all times and even peaks in 1930 with 1,14. This is remarkable, as literature indicates that liquidity was to fall rapidly after foreign capital fled in 1929. However, Adalet (2003) does mention that mortgage banks were less affected by the 1931 crisis than other types of banks due to the long term nature of their assets and liabilities.

Credit banks When looking at the number of banks in the credit banks sector in the period 1924 – 1928, it immediately strikes that the number of large credit banks remains the same during the years. The number of aggregated credit banks however, rises in the first year and then slowly decreases during the remaining years.

The consequent number of large credit banks might be an indication of the stableness of this type of bank. As mentioned in the literature, large banks were very unlikely to collapse because investors had a lot of trust in them due to an almost guaranteed bail out if the bank was to be in trouble. This meant that they were not very likely to withdraw their deposits. The pattern of the aggregated credit banks however, looks different. The rise in banks during the year 1924 – 1925 could be explained by the recovery from the hyperinflation; Due to foreign deposits the economy stabilized and this new prosperity allowed for some grow in the banking sector. Along with this new prosperity came intensified competition. This competition might again explain why the number of aggregated credit banks declines during the years 1925 – 1927.

The quick ratios also show the same pattern; They decrease during the years 1924 – 1927. This is more clear for the large credit banks than for the aggregated credit banks, but it is safe to say that a decline is visible. This decrease could again be due to the increased competition in the banking sector; In order to compete in the market banks started to lend as much as possible. This caused their cash reserves to decline, just as their liquidity levels. It also stands out that the ratios of the large credit banks are always lower than the ratios of the aggregated credit banks. This phenomenon is also discussed in the literature; Due to the presumed governmental back-up, the large banks felt safe to maintain lower liquidity levels than other banks. These data show that this assumption was right.

A. de Beer - The German banking crisis of 1931 30

Chapter 4: Conclusion and discussion

Conclusion Although the research of this thesis has some clear limitations, it is still possible to construct some answers on the questions posed at the beginning. Whether the crisis was national or international in origin and whether we were dealing with a currency or a banking crisis still remains in question. Fact is that the German crisis of 1931 struck with an unprecedented fierceness and hit the nation with such force that it requires a lot of study to ultimately discover the truth.

When looking at the banking system of the interwar period, one cannot help to notice a lack of structure; Regulations regarding liquidity were barely there, external reports like balance sheets differed for each year, the Reichsbank failed to act as a lender of last resort and large banks gave rise to problems of moral hazard. These kind of problems intensified the crisis, but also make it much more difficult the analyze the banking sectors.

If we take state banks into consideration we could say that it was undesirable for state banks to collapse for the same reason as for large banks; It would be a too great shock for the economy if such an entity was to fall away. This type of banks had to take care not to take too large risks and was probably backed up by the states they belonged to. The results confirm these assumptions: the number of state banks is consistent over time and the quick ratio does not decline dramatically. This implicates that the state banks did not suffer much from the crisis of 1931.

Savings and loan clearing banks became universal banks after the hyperinflation, implicating that they too were able to participate in the newly intensified competition; They had been greatly hit by the hyperinflation and these new regulations helped them recover. The tightened competition caused banks to use their new acquired foreign capital to engage in more lending practices. These practices drove liquidity down. This is exactly what we see happening in the results. In the period that competition intensified, we see an increase in the number of banks and a clear decrease in the quick ratio. Next to that, the savings banks had their own central institutes, the Girozentralen, which managed the savings banks’ mandatory liquidity reserves. These established mandatory liquidity reserves might have saved the savings banks from a lot of harm. Although the quick ratio decreases more during the years of the banking crisis than did the ratio of the state banks, the impact of the crisis was not severe for savings banks.

A. de Beer - The German banking crisis of 1931 31

Mortgage banks were also hit hard by the hyperinflation. This was because mortgage banks, just like savings and loan clearing banks, have a lot of long term assets that enormously lost value in this period. This long term nature of their assets proved to be a disadvantage during the hyperinflation, but an advantage during the crisis of 1931; Because loans and deposits are set down for a long time with a fixed interest rate, capital does not flee as easily as at the other types of banks. In our results the number of mortgage banks drops with six in 1930, giving rise to suspicions that this was due to the crisis. The quick ratios however, appear to show no sign of the crisis at all; The ratio hovers around 1,00 at all times and even peaks in 1930 with 1,14. It is not possible to explain this remarkable phenomenon on the basis of the used data of this research.

Credit banks were universal banks and had close ties with industry. These banks were willing participants in the new system of foreign credit; They combined deposit and investment activities and were more sensitive to stock market fluctuations than other types of banks. These facts, their close ties to the market, the heavy lending practices resulting from the intensified competition and their sensitivity to fluctuations, caused credit banks to be hit the hardest during the crisis of 1931. It is a real shame that the database used for this thesis does not provide balance sheets of the credit banks during the crisis years, for these would be the most interesting ones. The distinction made between large credit banks and aggregated banks however, does tell us something about the quick ratios of large banks. As literature predicts, these are higher than the quick ratios of the aggregated banks. This implicates that size does influence the liquidity level of a bank. Next to that, it is possible to discern a decreasing line in the quick ratios of the credit banks during the period 1924 – 1927. This decrease in liquidity was probably due to the increased competition. When seeing this trend and taking into consideration that there was no state, Girozentrale or collection of long-term assets to keep liquidity in control, it can be anticipated that these quick ratios will only decrease further during the years of crisis.

Concluding, characteristics and liquidity of a banking sector are in connection with each other. Whether a bank was universal or not, the connection with the government, the regulations of a central institution, the structure of assets, the ties with industry and size all influence the quick ratios held by the banks. The lower the quick ratios, the harder the crisis would hit the banking sector; Low levels of liquidity implied that a bank could not handle much blows the moment foreign capital had fled away. The run on the currency, the breakdown of companies and the distrust in the banking sector ultimately led to the destruction of the German capital system. The once so prosperous nation lost its glory. Capital flows remained restricted for

A. de Beer - The German banking crisis of 1931 32 years and the full convertibility of the currency was not reached until long after the war. More research is still necessary to identify the exact causes and nature of this crisis. Let us hope lessons can be learned in order that such tragedies are never to happen again in the future.

Recommendations for future research As literature in general and limitations on my own work already indicate, there is still much room left for future research. Even though much research has already been conducted on the subject, all kinds of questions remain. First, future researchers should focus on the question what the exact cause was of the banking crisis of 1931. At this moment, many answers exist, some could be combined to give a multifocal answer, while others clearly contradict each other. It is in the interest for societies to know the exact causes of the crisis of 1931, for this might help economies prevent making the same mistakes. Understanding of these causes might help recognize and prevent early signs of new crises in the future.

Second, another question that remains focuses on the nature of the crisis. Was the crisis a currency, banking or twin crisis? Many researchers have already spoken their minds on the matter. Fact remains however, that a lot of their papers are not in agreement with each other. Defining its type would help us filter the noise and determine which phenomena of that time were due to the crisis. Moreover, consensus on this matter would enable researchers to construct a clear picture of aspects of this crisis which are blurry at this point.

Third, as for my own research, it would be wonderful if future researchers could redevelop balance sheets that are structured in the same way for all years during the interwar period. These data would give genuine and reliable information about the way each banking sector remained solvent or not. Especially correct data on the credit banks would be of huge importance, because the available literature indicates that these banks were hit the hardest. It is therefore that they form the most interesting sector to investigate where things went wrong in their finances.

As a concluding remark, it is in everyone his interest to understand events that had a great impact on our history, for these are the events that have shaped our economies as we know it.

A. de Beer - The German banking crisis of 1931 33

References

Adalet, M. (2003). Fundamentals, Capital Flows and Capital Flight: The German Banking Crisis of 1931. Berkely: University of California, Job Market Paper.

Balderston, T. (1994). The Banks and the Gold Standard in the German Financial Crisis of 1931. Financial History Review, 1, 43-68.

Ferguson, Thomas & Temin, P. (2001). Made in Germany: The German Currency Crisis of July 1931. Massachusetts Institute of Technology, Department of Economics Working Paper: 01/07.

Holdsworth, J. T. (1914). Money and Banking. New York: D. Appleton and Company.

Kindleberger & Charles, P. (1973). The World in Depression, 1929-1939. Berkely: University of California Press.

Lewis, W. A. (2003). Economic Survey 1919 – 1939. London: Routledge.

Pohl, M. & Freitag, S. (1994). Handbook on the History of European Banks. Aldershot: Edward Elgar Publishing Limited.

Schnabel, I. (2005). The Role of Liquidity and Implicit Guarantees in the German Twin Crisis of 1931. Max Planck Institute for Research on Collective Goods.

Schnabel, I. (2004). The German Twin Crisis of 1931. The Journal of Economic History, 64, 822- 871.

Statistisches Reichsamt: Statistisches Jahrbuch für das Deutsche Reich, 1924 – 1928.

Too big to fail. (n.d.). In Business Dictionary. Retrieved from http://www.businessdictionary.com/ definition/too-big-to-fail.html

Universal Banking (n.d.). In Investopedia. Retrieved from http://www.investopedia.com/terms/u/ universalbanking.asp

A. de Beer - The German banking crisis of 1931 APPENDIX 35

Appendix In this appendix the elaborated calculations of the quick ratio for the years 1925 – 1928 and 1930 - 1932 can be found.

The year 1925

State banks Staats- und Landesbanken 28/02/1926, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und Cou- 8,3 Gläubiger 1916,8 pons Guthaben bei Noten- und Abrech- 9,2 Akzepte und Schecks 18,7 nungsbanken Wechsel und unverzinsliche Schat- 390,8 Aval- und Bürgschafts- 19,8 zanweisungen verpflichtungen Nostroguthaben bei Banken und 358,4 Bankfirmen Reports und Lombards gegen bör- 42,3 sengängige Wertpapiere Eigene Wertpapiere 28,3 Schuldner in laufender Rechnung 1126,7 Total 1964 1955,3

In 1925 the quick ratio of the state banks equaled 1964/1955,3 = 1,004.

Savings and loan clearing banks Girozentralen 31/12/1925, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und Zins- 8,5 Gläubiger 915,2 scheine Guthaben bei Noten- und Abrech- 14,7 Akzepte und Schecks 1,4 nungsbanken

A. de Beer - The German banking crisis of 1931 36

Schecks, Wechsel und unverzinsliche 151,2 Schatzanweisungen Guthaben bei Banken und Bankfir- 146,7 men Darlehen gegen Unterpfand (täglich 46,2 rückforderbar) Eigene Wertpapiere 19,1 Außenstände in laufender Rechnung 365,2 Total 751,6 916,6

In 1925 the quick ratio of the savings and loan clearing banks equaled 751,6/916,6 = 0,820.

Mortgage banks Hypothekenbanken 31/12/1925, in millions of RM Current Assets Current Liabilities Kasse usw 22947 Guthaben von Banken 20778,9 Wechsel 38478,6 Kreditoren 249843,2 Guthaben bei Banken und Bank- 80582,6 Pfandbriefe 659617,3 firmen Debitoren 234761,8 Kommunalobligationen 100766,2

Effekten 45533,4 Darlehen der Rentenbank- 25059,2 Kreditanstalt Hypotheken 732650,3 Akzepte und Schecks 24811 Kommunal-Darlehen 104645,1 Sonstige Passiva 167081,9 Total 1259599 1247958

In 1925 the quick ratio of the mortgage banks equaled 1259599/1247958 = 1,009.

Credit banks Kreditbanken 31/12/1925, in 1000 RM Current Assets Aggregated Large Banks Current Liabilities Aggregated Large Banks Kasse usw 488564,2 404114,7 Guthaben von Banken 1238110,4 1162442,3

A. de Beer - The German banking crisis of 1931 37

Wechsel 2157204,6 1855024,6 Kreditoren usw 7102760 5359655 Guthaben bei 1405601,6 890561,7 Pfandbriefe 0 0 Banken und Bankfirmen Debitoren usw 5265161,8 4105268,5 Kommunalobligationen 0 0

Effekten 263453,5 147766,9 Akzepte und Schecks 335772,4 306066,1 Hypotheken 966,3 0 Sonstige Passiva 142512,3 42409,5 Total 9580952 7402736,4 8819155,1 6870572,9 Total 751,6 916,6

In 1925 the aggregated quick ratio of the credit banks equaled 9580952/8819155,1 = 1,086. The quick ratio of the big credit banks equaled 7402736,4/6870572,9 = 1,077.

A. de Beer - The German banking crisis of 1931 38

The year 1926

State banks Staats- und Landesbanken 28/02/1927, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und 9,8 Gläubiger 2241,5 Coupons Guthaben bei Noten- und Abrech- 16,1 Akzepte und Schecks 15,4 nungsbanken Wechsel und unverzinsliche 418,4 Sonstige Passiva 417,8 Schatzanweisungen Nostroguthaben bei Banken und 210,1 Bankfirmen Reports und Lombards gegen 153,5 börsengängige Wertpapiere Eigene Wertpapiere 104,7 Schuldner in laufender Rechnung 1415,9 Total 2328,5 2674,7

In 1926 the quick ratio of the state banks equaled 2328,5/2674,7 = 0,871.

Savings and loan clearing banks Girozentralen 31/12/1926, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und 9,1 Gläubiger 959,2 Zinsscheine Guthaben bei Noten- und Abrech- 9 Akzepte und Schecks 0,6 nungsbanken Schecks, Wechsel und unverzins- 132,6 liche Schatzanweisungen Guthaben bei Banken und Bank- 154 firmen

A. de Beer - The German banking crisis of 1931 39

Darlehen gegen Unterpfand 26,1 (täglich rückforderbar) Eigene Wertpapiere 80,9 Außenstände in laufender Rech- 278,7 nung Total 690,4 959,8

In 1926 the quick ratio of the savings and loan clearing banks equaled 690,4/959,8 = 0,719.

Mortgage banks Hypothekenbanken 31/12/1926, in 1000 of RM Current Assets Current Liabilities Kasse usw 34694,6 Guthaben von Banken 32869,2 Wechsel 71510,2 Kreditoren 421804,1 Guthaben bei Banken und Bank- 151425,5 Pfandbriefe 1731884 firmen Debitoren 339817,2 Kommunalobligationen 255513,6

Effekten 71397 Darlehen der Rentenbank- 124771,5 Kreditanstalt Hypotheken 1940845 Akzepte und Schecks 30875,1 Kommunal-Darlehen 268798,2 Sonstige Passiva 461884,8 Total 2878487 3059602

In 1926 the quick ratio of the mortgage banks equaled 2878487/3059602 = 0,941.

Credit banks Kreditbanken 31/12/1926, in 1000 RM Current Assets Aggregated Large Banks Current Liabilities Aggregated Large Banks Kasse usw 517995,5 415385,2 Guthaben von 1113042,7 1018909,6 Banken Wechsel 2535484,5 2149618,4 Kreditoren usw 9618951,9 7214331,1

A. de Beer - The German banking crisis of 1931 40

Guthaben bei 1780493,8 1083025,8 Pfandbriefe 671,2 0 Banken und Bankfirmen Debitoren usw 7110593,5 5534186,4 Kommunalobliga- 16305 0 tionen Effekten 406576,1 210363,3 Sonstige Schuld- 9766,3 45,3 verschreibungen Hypotheken 42091,1 0 Darlehen der 0 Rentenbank-Kre- ditanstalt Kommunal-Dar- 17837,6 0 Akzepte und 464156,2 412307,4 lehen Schecks Total 12411072,1 9392579,1 11222893,3 8645593,4

In 1926 the aggregated quick ratio of the credit banks equaled 12411072,1/11222893,3 = 1,106. The quick ratio of the big credit banks equaled 9392579,1/8645593,4 = 1,086.

A. de Beer - The German banking crisis of 1931 41

The year 1927

State banks Staats- und Landesbanken 29/02/1928, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und Coupons 89,5 Gläubiger 8135,1 Guthaben bei Noten- und Abrechnungs- 86,3 Akzepte und Schecks 432,7 banken Wechsel und unverzinsliche Schatzan- 2083,3 weisungen Nostroguthaben bei Banken und Bank- 963,3 firmen Reports und Lombards gegen börsengän- 556,2 gige Wertpapiere Eigene Wertpapiere 129,2 Schuldner in laufender Rechnung 4255,3 Total 8163,1 8567,8

In 1927 the quick ratio of the state banks equaled 8163,1/8567,8 = 0,953.

Savings and loan clearing banks Girozentralen 31/12/1927, in millions of RM Current Assets Current Liabilities Kasse, fremde Geldsorten und Zins- 10,8 Gläubiger 1114,7 scheine Guthaben bei Noten- und Abrechnungs- 10,7 Akzepte und Schecks 0,3 banken Schecks, Wechsel und unverzinsliche 88 Schatzanweisungen Guthaben bei Banken und Bankfirmen 222,7

Darlehen gegen Unterpfand (täglich 24,9 rückforderbar)

A. de Beer - The German banking crisis of 1931 42

Eigene Wertpapiere 124,3 Außenstände in laufender Rechnung 341,8 Total 823,2 1115

In 1927 the quick ratio of the savings and loan clearing banks equaled 823,2/1115 = 0,738.

Mortgage banks Hypothekenbanken 31/12/1927, in 1000 RM Current Assets Current Liabilities Kasse usw 28490,7 Kreditoren 540578,6 Guthaben bei Banken und Bankfirmen 0 Akzepte 40710,6 Wechsel usw 67351,8 Sonstige Passiva 199239,1 Nostro-Guthaben bei Banken und Bank- 209896,6 firmen Reports und Lombards gegen börsengan- 19395,2 gige Wertpapiere Eigene Wertpapiere 142627,2 Debitoren in laufender Rechnung 324235,4 Total 791996,9 780528,3

In 1927 the quick ratio of the mortgage banks equaled 791996,9/780528,3 = 1,015.

Credit banks Kreditbanken 31/12/1927, in 1000 RM Current Assets Aggregated Large Banks Current Liabilities Aggregated Large Banks Kasse usw 545808,9 424916,8 Kreditoren 13494929,9 10068772,9 Guthaben bei Ban- 200586,4 124483,3 Akzepte 597935,5 528207,8 ken und Bankfirmen Wechsel usw 2929841,3 2464764 Sonstige Passiva 118451,4 32689,8 Nostro-Guthaben bei 2056953,1 1305385,6 Banken und Bank- firmen

A. de Beer - The German banking crisis of 1931 43

Reports und Lom- 839538,6 687038,6 bards gegen börsen- gangige Wertpapiere Eigene Wertpapiere 515046,4 249091,3 Debitoren in laufen- 7150132,9 5232417,2 der Rechnung Total 14237907,6 10488096,8 14211316,8 10629670,5

In 1927 the aggregated quick ratio of the credit banks equaled 14237907,6/14211316,8 = 1,002. The quick ratio of the big credit banks equaled 10488096,8/10629670,5 = 0,987.

A. de Beer - The German banking crisis of 1931 44

The year 1928

State banks Staats- und Landesbanken 31/12/1928, in 1000 RM Current Assets Current Liabilities Kasse 44327,6 Kreditoren 1916905,4 Guthaben bei Banken 227539,9 Akzepte 6781,6 Wechsel 304062,7 Sonstige Passiva 34683,3 Reports und Lombards gegen börsengän- 136345,4 gige Wertpapiere Debitoren in laufender Rechnung 1142137 Eigene Wertpapiere 80305

Total 1934718 1958370,3

In 1928 the quick ratio of the state banks equaled 1934718/1958390,3 = 0,988.

Savings and loan clearing banks Girozentralen 31/12/1928, in 1000 RM Current Assets Current Liabilities Kasse 41759,4 Kreditoren 2838348 Guthaben bei Banken 686551,6 Akzepte 8584 Wechsel 239112,5 Sonstige Passiva 93126,3 Reports und Lombards gegen börsengän- 57058,5 gige Wertpapiere Debitoren in laufender Rechnung 1423657 Eigene Wertpapiere 282578,4

Total 2730717 2940058

In 1928 the quick ratio of the savings and loan clearing banks equaled 2730717/2940058 = 0,929.

Mortgage banks

A. de Beer - The German banking crisis of 1931 45

Hypothekenbanken 31/12/1928, in 1000 RM Current Assets Current Liabilities Kasse 32735,3 Kreditoren 597015,3 Guthaben bei Banken 278234,8 Akzepte 40603,4 Wechsel 73050,3 Sonstige Passiva 217932,1 Reports und Lombards gegen 36069,1 börsengängige Wertpapiere Debitoren in laufender Rechnung 362836,9 Eigene Wertpapiere 154657,5

Total 937583,9 855550,8

In 1928 the quick ratio of the mortgage banks equaled 937583,9/855550,8 = 1,096.

A. de Beer - The German banking crisis of 1931 46

The year 1930

State banks Staats- und Landesbanken 31/12/1930, in 1000 RM Current Assets Current Liabilities Kasse 35669,9 Kreditoren 2053498 Guthaben bei Banken 234634,1 Akzepte 13413 Wechsel 423503,6 Sonstige Passiva 19240,5 Reports und Lombards gegen börsengän- 100243,8 gige Wertpapiere Debitoren in laufender Rechnung 1170403 Eigene Wertpapiere 86313,3

Total 2050768 2086151

In 1930 the quick ratio of the mortgage banks equaled 2050768/2086151 = 0,983.

Savings and loan clearing banks Girozentralen 31/12/1930, in 1000 RM Current Assets Current Liabilities Kasse 49437,4 Kreditoren 2811530,3 Guthaben bei Banken 619753,6 Akzepte 5060 Wechsel 292430,1 Sonstige Passiva 156378 Reports und Lombards gegen börsengän- 19458,1 gige Wertpapiere Debitoren in laufender Rechnung 1411484 Eigene Wertpapiere 287914,1

Total 2680478 2972968,3

In 1930 the quick ratio of the savings and loan clearing banks equaled 3680478/2972968,3 = 0,902.

A. de Beer - The German banking crisis of 1931 47

Mortgage banks Hypothekenbanken 31/12/1930, in 1000 RM Current Assets Current Liabilities Kasse 45331,4 Kreditoren 616307 Guthaben bei Banken 269249,6 Akzepte 51508,4 Wechsel 64818,5 Sonstige Passiva 186885,3 Reports und Lombards gegen börsengän- 12675,6 gige Wertpapiere Debitoren in laufender Rechnung 387108,5 Eigene Wertpapiere 196969,7

Total 976153,3 854700,7

In 1930 the quick ratio of the mortgage banks equaled 976153,3/854700,7 = 1,142.

A. de Beer - The German banking crisis of 1931 48

The year 1931

State banks Staats- und Landesbanken 31/12/1931, in millions of RM Current Assets Current Liabilities Kasse 37 Kreditoren 1665 Guthaben bei Banken 104,4 Akzepte 84,7 Wechsel 450,8 Sonstige Passiva 19,8 Reports und Lombards gegen börsengän- 8,1 gige Wertpapiere Debitoren in laufender Rechnung 997,5 Eigene Wertpapiere 100,8

Total 1698,6 1769,5

In 1931 the quick ratio of the mortgage banks equaled 1698,6/1769,5 = 0,960.

Savings and loan clearing banks Girozentralen 31/12/1931, in millions of RM Current Assets Current Liabilities Kasse 55,2 Kreditoren 2097,4 Guthaben bei Banken 143,9 Akzepte 471,8 Wechsel 146,4 Sonstige Passiva 110,8 Reports und Lombards gegen börsengän- 52,2 gige Wertpapiere Debitoren in laufender Rechnung 1658,4 Eigene Wertpapiere 326,2

Total 2382,3 2680

In 1931 the quick ratio of the savings and loan clearing banks equaled 2382,3/2680 = 0,889.

A. de Beer - The German banking crisis of 1931 49

Mortgage banks Hypothekenbanken 31/12/1931, in millions of RM Current Assets Current Liabilities Kasse 41,2 Kreditoren 480,7 Guthaben bei Banken 170,6 Akzepte 53,2 Wechsel 50,5 Sonstige Passiva 194,2 Reports und Lombards gegen börsengän- 7,8 gige Wertpapiere Debitoren in laufender Rechnung 349,8 Eigene Wertpapiere 141

Total 760,9 728,1

In 1931 the quick ratio of the mortgage banks equaled 760,9/728,1 = 1,045.

A. de Beer - The German banking crisis of 1931 50

The year 1932

State banks Staats- und Landesbanken 31/12/1932, in millions of RM Current Assets Current Liabilities Kasse 33 Kreditoren 1713,7 Guthaben bei Banken 142,3 Akzepte 31 Wechsel 546,4 Sonstige Passiva 26,4 Reports und Lombards gegen börsengän- 6,1 gige Wertpapiere Debitoren in laufender Rechnung 949,8 Eigene Wertpapiere 65,6

Total 1743,2 1771,1

In 1932 the quick ratio of the state banks equaled 1743,2/1771,1 = 0,984.

Savings and loan clearing banks Girozentralen 31/12/1932, in millions of RM Current Assets Current Liabilities Kasse 44,2 Kreditoren 2182,5 Guthaben bei Banken 196,3 Akzepte 278,1 Wechsel 196,6 Sonstige Passiva 98,7 Reports und Lombards gegen börsengän- 47,1 gige Wertpapiere Debitoren in laufender Rechnung 1620,4 Eigene Wertpapiere 269,5

Total 2374,1 2559,3

In 1932 the quick ratio of the savings and loan clearings banks equaled 2374,1/2559,3 = 0,928.

A. de Beer - The German banking crisis of 1931 51

Mortgage banks Hypothekenbanken 31/12/1932, in millions of RM Current Assets Current Liabilities Kasse 26,5 Kreditoren 399,2 Guthaben bei Banken 169 Akzepte 44,7 Wechsel 73,2 Sonstige Passiva 252,2 Reports und Lombards gegen börsengän- 4,6 gige Wertpapiere Debitoren in laufender Rechnung 264,7 Eigene Wertpapiere 151

Total 689 696,1

In 1932 the quick ratio of the mortgage banks equaled 689/696,1 = 0,990.

A. de Beer - The German banking crisis of 1931