Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

Germany

While Britain passed through the stages of capitalism in this fashion, Germany was passing through the same stages in a different way.

In Germany, capital was scarce when industrialism arrived. Because savings from commerce, overseas trade, or small artisan shops were much less than in Britain, the stage of owner-management was relatively short. Industry found itself dependent upon banks almost at once. These banks were quite different from those in England, since they were “mixed” and not divided into separate establishments for different banking functions. The chief German credit banks, founded in the period 1848-1881, were at the same time savings banks, commercial banks, promotion and investment banks, stockbrokers, safety deposits, and so on. Their relationship to industry was close and intimate from the creation of the Darmstadter Bank in 1853. These banks floated securities for industry by granting credit to the firm, taking securities in return. These securities were then slowly sold to the investing public as the opportunity offered, the bank retaining enough stock to give it control and appointing its men as directors of the enterprise to give that control final form.

The importance of the holding of securities by banks can be seen from the fact that in 1908 the Dresdner Bank was holding 2 billion marks’ worth. The importance of interlocking directorates can be seen from the fact that the same bank had its directors on the boards of over two hundred industrial concerns in 1913. In 1929, at the time of the amalgamation of the Deutsche Bank and the Disconto Gesellschaft, the two together had directorships in 660 industrial firms and held the chairmanship of the board in 192 of these. Before 1914, examples of individuals with thirty or even forty directorships were not uncommon.

This banking control of industry was made even closer by the use which the banks made of their positions as brokers and depositories for securities. The German credit banks acted as stockbrokers, and most investors left their securities on deposit with the banks so that they could be available for quick sale if needed. The banks voted all this stock for directorships and other control measures, unless the owners of the stock expressly forbade it (which was very rare). In 1929 a law was passed preventing the banks from voting stocks deposited with them unless this had been expressly permitted by the owners. The change was of little significance, since by 1929 financial capitalism was on the wane in Germany. Moreover, permission to vote deposited stock was rarely refused. The banks also voted as a right all stock left as collateral for loans and all stock bought on margin. Unlike the situation in America, stocks bought on margin were considered to be the property of the bank (acting as stockbrokers) until the whole price has been paid. The importance of the stock-brokerage business to German banks may be seen in the fact that in the twenty-four years 1885-1908 one-quarter of the gross profits of the large credit banks came from commissions. This is all the more remarkable when we consider that the brokerage commissions charged by German banks were very small (sometimes as low as one-half per thousand).

By methods such as these, a highly centralized financial capitalism was built up in Germany. The period begins with the founding of the Darmstadter Bank in 1853. This was the first bank to establish a permanent, systematic control of the corporations it floated. It also was the first to use promotion syndicates (in 1859). Other banks followed this example, and the outburst of promotion reached a peak of activity and corruption in the four years 1870-1874. In these four years, 857 stock companies with 3,306,810,000 marks of assets were floated, compared to 295 companies with 2,405,000,000 in assets in the preceding nineteen years (1851-1870). Of these 857 companies founded in 1870-1874, 123 were in the process of liquidation and 37 were bankrupt as early as September 1874.

These excesses of financial capitalist promotion led to a governmental investigation which resulted in a strict law regulating promotion in 1883. This law made it impossible for German bankers to make fortunes out of promotion and made it necessary for them to seek the same ends by consolidating their control of industrial corporations on a long-term basis. This was quite different from the United States, where the absence of any legal regulation of promotion previous to the SEC Act of 1933 made it more likely that investment bankers would seek to make short-term “killings” from promotions rather than long-term gains from the control of industrial companies. Another result is to be seen in the relatively sounder financing of German corporations through equity capital rather than through the more burdensome (but promoter-favored) method of fixed interest bonds.

The financial capitalism of Germany was at its peak in the years just before 1914. It was controlled by a highly centralized oligarchy. At the center was the Reichsbank whose control over the other banks was relatively weak at all times. This was welcomed by the financial oligarchy, for the Reichsbank, although privately owned, was controlled by the government to a considerable degree. The weakness of the Reichsbank’s influence over the banking system arose from the weakness of its influence over the two usual instruments of central-banking control—the rediscount rate and open-market operations. The weakness of the former was based on the fact that the other banks rarely came to the Reichsbank for rediscounts, and usually had a discount rate below that of the Reichsbank. A law of 1899 tried to overcome this weakness by forcing the other banks to adjust their discount rates to that of the Reichsbank, but it was never a very effective instrument of control. Open-market control was also weak because of an official German reluctance “to speculate” in government securities and because the other banks were more responsive to the condition of their portfolios of commercial paper and securities than they were to the size of their gold reserves. In this they were like French rather than British banks. Only in 1909 did the Reichsbank begin a deliberate policy of control through open-market operations, and it was never effective. It was ended completely from 1914 to 1929 by the war, the inflation, and the restrictions of the Dawes Plan.

Because of these weaknesses of the Reichsbank, the control of German financial capitalism rested in the credit banks. This is equivalent to saying that it was largely beyond the control of the government, and rested in private hands.

Of the hundreds of German credit banks, the overwhelming preponderance of power was in the hands of the eight so-called “Great Banks.” These were the masters of the German economy from 1865 to 1915. Their overwhelming position can be seen from the fact that of 421 German credit banks in 1907 with 13,204,220,000 marks capital, the eight Great Banks held 44 percent of the total capital of the group. Moreover, the position of the Great Banks was better than this because the Great Banks controlled numerous other banks. In consequence, Robert Franz, editor of Der Deutsche Oekonomist, estimated in 1907 that the eight Great Banks controlled 74 percent of the capital assets of all 421 banks.

This power of financial capitalism in Germany was badly shaken by the First World War—in theory more than in fact. It was fatally injured by the postwar inflation, and subjected completely by the depression and by the actions of Hitler after 1933. The turning point from financial to monopoly capitalism was in the year or so following the end of the inflation (1924). In that year the inflation was ended, cartels were given a special legal status with their own Cartel Court to settle disputes, and the greatest creation of financial control ever constructed by German financial capitalism collapsed. The inflation ended in November 1923. The Cartel Decree was November 2, 1923. The great control structure was the Stinnes combine, which began to fall apart at the death of Hugo Stinnes in April 1924. At that time Stinnes had complete control of 107 large enterprises (mostly heavy industry and shipping)and had important interests in about 4,500 other companies. The attempt (and failure) of Stinnes to turn this structure of financial controls into an integrated monopoly marks the end of financial capitalism in Germany.