Q. By whom are the shares of the Reichsbank owned?
A. It is all private ownership. The shares are held mostly in Germany and Holland, and distributed in small lots.
Q. Would the bank discount a bill drawn by one merchant and accepted by another?
A. Yes. The Reichsbank is not only a bank for banks, but for the commercial and industrial enterprises of the Empire.
Q. If a railroad finds it necessary to make improvements and wants to borrow money could they get money at the Reichsbank?
A. Only on collateral acceptable by the Reichsbank. The railroad would probably in such a case go to private banks to be financed.
Q. Assume that there is a manufacturer in Bremen, making well-known articles, which he ships to a merchant in Berlin and draws a bill against that merchant, would it be a satisfactory bill to the Reichsbank?
A. Yes; but in that instance also the merchant would probablygo to the private bank, where he would get a better rate of discount.
Q. If there were a severe money stringency, would he still go to his bank?
A. Yes; that would probably be the case, and his bank might afterwards take his bills to the Reichsbank.
Q. What is the smallest bill the bank will discount?
A. We have no minimum. We discount bills as low as 10 marks.
Q. Upon what kind of a bill does the farmer secure an advance from the bank?
A. He sells his produce, draws a bill upon the purchaser, and takes the bill to the bank as any other man would do, or a bill might be drawn upon a farmer and accepted by him.
Q. When he borrows money in the spring with which to buy seeds, how does he secure the cash?
A. He goes to his own bank for that. There are co-operative societies for this purpose, which are a great factor in Germany.
Q. Will the manager of a branch of the Reichsbank renew a farmer's three months' bill if desired?
A. Yes; an exception is made for the farmer. Other bills are not renewed.
Q. The bank rate is 4 per cent. Does that mean 4 per cent. is charged on three months' bills?
A. The Reichsbank has only one rate of discount. There was a time when the Reichsbank did a similar business to that which the Bank of England does now,i. e., that they would purchase in the market prime bills at a more favourable rate, but in 1896 it was decided to have but one rate for everybody.
Q. Please state the reason for the change of policy.
A. The most important reason was that it was thought that a great central institution like the Reichsbank, with its tasks and duties to the whole of the community, ought not to make a distinction of any class, or make an exception in favour of any one. It is the policy of the bank to serve all alike.
Q. Is the Reichsbank disposed to favour every application for discount or loans if the character of the offering be satisfactory?
A. It is their duty to listen to every one who comes for accommodation, whether he has an account or not. The principle of the Reichsbank is not to serve a part of the community, but the whole. The Reichsbank is for everybody.
Q. Are your deposits subject to check?
A. The money is drawn against check. There are two kinds of check—white and pink. The white is for withdrawing cash over the counter, the pink for making transfers.
Q. Have you different classes of deposits?
A. No.
Q. Do you pay interest on your deposits?
A. The Reichsbank does not pay interest on money deposited with it. It receives money on deposit and for transfer. Most large houses keep an account with the Reichsbank. The Reichsbank does a large transfer business for them.
Q. Is it the custom for banks in Berlin and other important centres to carry balances in the Reichsbank as a part of their reserve?
A. It is the custom for the banks to keep a large part of their cash with the Reichsbank. They keep only a small amount of cash in their tills.
Q. Is that true of banks in other cities than Berlin?
A. Yes.
Q. Does the Reichsbank pay the same taxes that the other banks do? For instance, income tax and other taxes?
A. No; we are free from the government income tax, and the license fees, but we must pay the real-estate tax.
Q. What is the relation between this bank and other banks, such as the Deutsche and the Dresdner—that is, as to the character of business transacted? Are you not competitors?
A. It may be said that the Reichsbank is more restricted by law. At a private bank the rate of discount may be much cheaper than at the Reichsbank. The private banker knows his clients, and he may be willing to accept from them a bill that the Reichsbank would not and could not accept.
Q. Then there is to some extent competition?
A. Yes; but that competition is not large. It is not felt that the Reichsbank is a competitor of other banks, but it is a public institution. The Reichsbank has its official rate,which is higher than the private rate. A bank will take bills on its own account running three months or more and hold them, and in case of need will take bills running ten days or less to the Reichsbank for discount. The Reichsbank pays no interest and acts as agent for transfer of currency and credit to all parts of the Empire without charge.
Q. Has there been any feeling that your branches were supplanting the private local banks in small towns?
A. There may have been some instances where a banker may have been dissatisfied at the Reichsbank opening a branch in his locality, but as a rule the banks at such a place are quite pleased to have the Reichsbank open a branch in order that they may have the benefits of its facilities.
Q. The government deposits are received and treated exactly the same as the deposits of farmers?
A. Yes. The business for the Government and its departments is handled the same as for others, and no interest is paid on deposits. There is, however, one exception; every private institution is required to keep a minimum balance to its credit, but not so with the departments of the Government. The Empire keeps in the aggregate sufficient to compensate.
Q. Do you always charge a higher rate of discount for bills when you have a large amount of taxed notes outstanding?
A. No. On occasions the Reichsbank has not increased its rate of discount above 5 per cent. At times we have discounted even at 3 per cent., when we have had to pay a tax of 5 per cent.
Q. It has been suggested to us as a matter of policy in times of stress that it would be better for you to add the 5 per cent. tax to the rate of discount.
A. The Reichsbank must be considered in the first place as a public institution which has to take care of the public interest, and secondarily as a money-making institution.
Q. Is there any restriction as to the percentage of silver in your reserve?
A. No; but there is another law, the coinage act, by which the amount of silver coined depends upon the population. They do not coin more than 20 marks per capita.
Q. What steps do you take to increase your gold reserve or to protect it?
A. We always have a large amount of bills of exchange payable in foreign countries, payable in gold. We also increase the rate of discount. We consider that the latter measure is the only effective one. We also make advances without interest to importers for the time the gold is in transit; we do that even in times when the ordinary gold import point is not reached. Then we may raise our tariff for the purchase of foreign gold coins, as the Bank of England does.
Q. Do you take any steps to prevent exports of gold? We have been told that it is the habit of the Reichsbank, in case of large exports of gold from Germany, to suggest to the other banks that it is not agreeable to have the gold exported.
A. It has never been the case and never will be the case that any such suggestion has been made by the Reichsbank to anybody.
Q. When was this bank organised?
A. In 1772.
Q. What is the capital of the bank?
A. One hundred million marks.
Q. By whom are the shares owned?
A. There are no shares; the capital is owned by the bank, which may be regarded as a juristic person, an independent legal subject.
Q. Who invested the money?
A. The money was originally invested by stockholders in the time of Frederick II, but afterwards the shareholders gave up their stock, for which they were paid. The shares were mostly owned by the King and by his associates, and they handed them over to the bank, so the capital is really ownedby the bank itself. The proceeds in excess of all the expenses are paid to the Prussian State.
Q. Who is responsible for the conduct of the business?
A. The president.
Q. Has he associated with him directors?
A. No; he is personally responsible.
Q. By whom is the president appointed?
A. By the King of Prussia for life.
Q. What are the particular functions of the bank?
A. In the first place, it is an organisation to help the State of Prussia. The principal part of the business is to finance the loans of the State. It may undertake the loans alone, but as a rule it heads a syndicate of the large banks.
Q. Do you compete for deposits from merchants, manufacturing concerns, banks, etc., with the Deutsche Bank or the Dresdner Bank?
A. Yes, to some extent. It is not our intention to do so, but of course we practically compete in some ways. Our rates on deposits are less favorable than those of these banks.
Q. Do you take real estate mortgages?
A. No.
Q. You are known as the sea-trade (Seehandlung) society. Why is that?
A. Frederick the Great founded the Seehandlung to promote Prussian trade, especially the oversea trade. At one time this company had a salt monopoly and a wax monopoly. The salt which came into the different ports of Prussia and the wax which came from Poland were bought up by the Seehandlung. At one time the Seehandlung also had mills, spinning and weaving plants, iron foundries, and river steamers. We still own two industrial establishments, the flour mills in Bromberg and a linen spinnery in Landeshut in Silesia.
Q. A large percentage of your funds is loaned on the stock exchange?
A. Yes.
Q. And your discount business is comparatively insignificant?
A. Not insignificant, but small compared with our loans on the stock exchange.
Q. Do you receive promissory notes from customers?
A. No.
Q. Do you transact business of any other character than that heretofore mentioned?
A. We have a branch known as the Royal Loan Office, which lends money in small amounts upon the pledge of different kinds of goods as security. This was established in 1834. In 1906 we made 99,000 loans upon watches, jewels, clothing, etc., at an average of 31 marks per loan. Two-thirds of the borrowers are labourers; last year about 16 per cent. were widows and spinsters, also a few were mechanics—occasionally professional men—artists, actors, and the like. Our rate is very low, 12 per cent. for the year, which is low compared with the ordinary pawnshops. No other banks conduct a business of this class.
Q. When was your bank organised?
A. In the year 1870.
Q. How is your stock owned?
A. By a large number of shareholders. Our shareholders are principally in Germany, but also in England, France, Austria, and elsewhere.
Q. What does the item "Shares in other banks," $19,000,000, represent?
A. This represents the purchase by us of practically the controlling interest in 13 independent banks in the Empire. We are represented upon each board and we are kept closely informed of the business. Our return is in the dividends.
Q. A large percentage of the stock exchange business is really handled through the incorporated banks, is it not?
A. Yes. We ourselves have fifty members on the stock exchange.
Q. You mean that the Deutsche Bank has fifty men, membersof the stock exchange, who trade there on the floor?
A. Yes. There is quite a difference, however, in our method of handling the business from that followed in New York. We do not have the margin system. Most of our customers who do not pay in full pay at least for half the amount involved in the purchase.
Q. Are the clearing-house associations important factors in the cities in Germany?
A. No. They are not associations of importance or power, but merely pieces of machinery through which cheques are cleared.
Q. You all go to the Reichsbank to clear?
A. Yes; once a day. There are 14 clearing houses and 160 members in the Empire.
Q. What taxes do you have to pay?
A. We pay to the State 4 per cent. on our income remaining after deduction of 3-1/2 per cent. of our share capital, which is exempt, and to the city of Berlin 4 per cent. on our income. All banks pay on the same basis.
Q. Is there a limit to the amount of discretion given to the branch directors on first-class bills?
A. Each of the main branches has a fixed capital arbitrarily set aside by the Deutsche Bank. They have a sum according to the importance of the branch, and they must do business according to it.
Q. The Reichsbank has branches everywhere?
A. Yes; in every place where there is sufficient business. It has about 500 branches. We transferred through the Reichsbank last year 21,000,000,000 marks. Our strength is the Reichsbank. Our branch in Bremen, for instance, wants money when cotton shipments start, and the money is transferred to them. The importers in Bremen sell the cotton to the large manufacturers. When they get the money the money comes back to us.
Q. In London the joint-stock banks usually pay interest at about 1-1/2 per cent. below the bank rate. In the country they have to pay more. What is the custom here?
A. There is no strict rule. The bank rate is now 4 per cent. and we allow 1-1/2 per cent. on call money. In the interiorour branches allow a little more. It is the same as in England.
Q. Does the bank rate influence your rate for discounts?
A. Yes; we are influenced. The bank rate is now 4 per cent. and our private discount rate is 2-1/2 per cent.
Q. If a mercantile customer came with a four months' bill satisfactory in character, what would be the rate to him?
A. We have no fixed rate. It depends upon the man and the bill.
Q. How do you invest your surplus funds when you have no demand from customers?
A. We buy bills in the open market, or accept offerings made to us from houses desiring to borrow.
Q. What is the date of your organisation?
A. 1872.
Q. In practice, you and all other banks endeavour to fully employ all available funds?
A. Yes; we only carry in the Reichsbank and other banks sufficient cash for the conduct of business.
Q. You regard your item "Bills discounted" as one of practical reserve?
A. Yes; it is immediately convertible into cash at the Reichsbank.
Q. Referring to the item "Shares in other banks," $6,662,753, do you control all banks in which you have any interest?
A. Yes; practically. We probably have not the majority of the stock in any bank; but our holdings are sufficiently large to give us control.
Q. Is the tendency toward bank consolidation? Are the smaller banks becoming more closely affiliated with the larger banks?
A. Yes; because it serves a mutual advantage. The smaller bank needs better facilities to take care of the increasing business.If a bank wants to increase its capital, and the shareholders do not care to subscribe for the increase, the new shares are frequently offered to us. We look out for the business of these banks in the centres and give them participations in some of our important undertakings.
Q. In Great Britain we found that banking interests were practically controlled by from 15 to 20 large banks. Does that condition prevail in Germany?
A. No; but the tendency is in that direction. One difference between the banks of England and Germany is this—in England the primary purpose of the banks seems to be to secure large earnings for their shareholders. In Germany our banks are largely responsible for the development in the Empire, having fostered and built up its industries.
Q. Would it be any reflection upon a bank if it should go to the Reichsbank for discounts or loans in easy times?
A. No; we seldom go in easy times, however, because there is no need of our doing so.
Q. Is there strong competition between the important banks of Berlin or do they work more or less together?
A. Of course there is strong competition between the large, important banks, but there is no lack of harmony, and they very frequently work together in syndicate operations. While it is the desire and endeavour of each bank to build up its business, it must be recognised that each institution has more or less its own field of operation, which is in a measure respected by the other banks. As, for instance, the Deutsche Bank has done a very large volume of business with Turkey, and business emanating from that source is expected to and naturally does go to the Deutsche Bank, while another institution may have been largely identified with Roumania, or another with some large local interest. We ourselves are recognised as representing the Krupp interest and have just recently formed a syndicate to finance one of their operations.
Q. Our understanding is that a merchant, a customer of yours, may arrange with you for a credit of, say, 100,000 marks, which may or may not be secured, and may draw a ninety-day bill upon you for that amount. He may send that bill to the Deutsche Bank for discount. If the Deutsche Bankwill discount it, they present it to you and you accept it. Will you kindly state why this custom prevails?
A. One reason is that it makes a bill which is acceptable at the Reichsbank and is a prime bill. We receive one-fourth of 1 per cent., or more, for our acceptance, and the Deutsche Bank, or any other bank discounting, invests its money at a rate for the period. It might be that we would prefer to give our customers a cash credit rather than to accept his bill, in which event we would so arrange.
Q. Then this practically enables you to sell your credit without using your cash?
A. Yes.
Q. We understand this is the usual custom in Germany.
A. Yes.
Q. Is it not a fact that in the last analysis the customer who uses the money usually pays more than the bank rate—that is, would it not cost him, in such a transaction to-day, say 5 or 6 per cent., while the bank rate is 4 per cent.?
A. Yes.
Q. Is it your endeavour to reach the small country towns?
A. No.
Q. In the United States we have brokers who handle commercial paper, and many of the banks purchase it to employ their surplus funds. In London we found discount houses whose sole business was to handle paper for sale to banks to employ their surplus funds. What corresponds to that agency in Berlin?
A. In Berlin there are two brokers who handle prime bills, but they are not an important factor.
Q. How do you employ your surplus funds?
A. We buy bills in the market or through these brokers.
Q. In employing your surplus funds do you buy any other bills than those which the Reichsbank would accept?
A. No.
Q. Would you consider the issue of taxed notes by the Reichsbank in a sense an evidence of an abnormal condition?
A. No: on the contrary, it is quite normal. Last year it happened twenty-five times.
Q. In times of trouble do the large banks, like your own, theDeutsche Bank, and Disconto, co-operate with the Reichsbank in an endeavour to prevent the exportation of gold?
A. Yes. Opinions are divided as to whether it is for the good of our country to do so or not. Last year, for instance, many people asked for gold. It was refused at first in some quarters; later we shipped freely.
Q. Are you members of the stock exchange?
A. All banks and bankers are members of the stock exchange.
Q. By virtue of their being banks?
A. Yes; they have to pay a tax for the exchange.
Q. Are the seats expensive?
A. No. You do not buy a seat. There is no limit to the number of people admitted. We have from twenty to thirty people go to execute our orders.
Q. When was this bank organised?
A. In 1823, under the general companies act.
Q. What are its particular functions?
A. This bank might be called strictly a clearing bank. It clears transactions made on the stock exchange and also cheques on banks which do not clear through the Reichsbank Clearing House. As you know, our banks do a large stock exchange business. It is their custom to send to us all securities sold to others clearing through us with a list of the purchasers. We charge the purchasers the amounts due from them and credit the amounts received from them, balancing every night. The securities are delivered to the various purchasers.Some settlements are made daily and others monthly.A large volume of cheques and bills are also cleared. This is simply a clearing business.
Q. You show loans and discounts in your statement. What is the character of these?
A. We invest our funds in first-class loans and prime bills.
Q. Is this bank owned by the other banks?
A. It is partly owned by other banks. There is also a commission of shareholders of the bank, among whom are the first banks of our city. These are members of our board.
Q. Is it the custom for all banks which clear through you to have a balance in order to facilitate the payment of debits through clearing?
A. Yes.
FOOTNOTES:[184]Adapted from Geh. Oberfinanzrat Waldemar Mueller,The Organization of Credit and Banking Arrangements in Germany; Max Wittner and Siegfried Wolff,The Method of Payment by means of Bank-Account Transfers and the Use of Checks in Germany. Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 117-271.[185]In order to facilitate its giro business and reduce the friction to a minimum, the Reichsbank has special printed forms prepared for the various kinds of transactions, the use of which is made compulsory on the public. For a simple transfer of money from one customer to another, whether they be in the same town or in different places, the "red check" is employed, which is filled out by the party making the transfer and handed in to the bank. It is not a check in the proper sense of the term, but is so called because the printed forms resemble checks and are put up in books in the same way as checks. The word "check" does not occur in the printed matter of the blank; neither is the instrument transferable. When a number of payments are made simultaneously the party making the transfers is furnished with a blanket form on which the names of the individual firms and the various sums are entered and which has to be accompanied by a red check covering the aggregate amount. For the so-called "great banks" of Berlin, some of which have a volume of transfer transactions amounting to as much as one hundred transfers for each bank per diem, there are blanket forms which are of a different colour for each bank. When cash is wanted the so-called "white check" is employed. This is a legally constituted check. There are special printed forms for the use of those who have no account with the Reichsbank.[186]Banks of issue were formerly numerous in Germany. Gradually, however, nearly all of them renounced the privilege of issue, as the laws relating to banking made their existence as banks of issue more and more difficult. At the present time there are only 4 such banks besides the Reichsbank, viz.: the Bayerische Notenbank, the Wurttembergische Notenbank, the Sachsische Bank, and the Badische Bank.[187]Adapted from Robert Franz,The Statistical History of the German Banking System, 1888-1907, Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 7-115.[188]Adapted from C.R. Fay,Co-operation at Home and Abroad, pp. 42-51, 56. P.S. King and Son, London. 1908.[189]Occasionally even as low as 1d.or less.[190]Adapted fromInterviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2d. Session, pp. 452-468.[191]Ibid., pp. 335-358.[192]Ibid., pp. 359-370.[193]Ibid., pp. 371-391.[194]Ibid., pp. 392-418.[195]Ibid., pp. 486, 487.
[184]Adapted from Geh. Oberfinanzrat Waldemar Mueller,The Organization of Credit and Banking Arrangements in Germany; Max Wittner and Siegfried Wolff,The Method of Payment by means of Bank-Account Transfers and the Use of Checks in Germany. Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 117-271.
[184]Adapted from Geh. Oberfinanzrat Waldemar Mueller,The Organization of Credit and Banking Arrangements in Germany; Max Wittner and Siegfried Wolff,The Method of Payment by means of Bank-Account Transfers and the Use of Checks in Germany. Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 117-271.
[185]In order to facilitate its giro business and reduce the friction to a minimum, the Reichsbank has special printed forms prepared for the various kinds of transactions, the use of which is made compulsory on the public. For a simple transfer of money from one customer to another, whether they be in the same town or in different places, the "red check" is employed, which is filled out by the party making the transfer and handed in to the bank. It is not a check in the proper sense of the term, but is so called because the printed forms resemble checks and are put up in books in the same way as checks. The word "check" does not occur in the printed matter of the blank; neither is the instrument transferable. When a number of payments are made simultaneously the party making the transfers is furnished with a blanket form on which the names of the individual firms and the various sums are entered and which has to be accompanied by a red check covering the aggregate amount. For the so-called "great banks" of Berlin, some of which have a volume of transfer transactions amounting to as much as one hundred transfers for each bank per diem, there are blanket forms which are of a different colour for each bank. When cash is wanted the so-called "white check" is employed. This is a legally constituted check. There are special printed forms for the use of those who have no account with the Reichsbank.
[185]In order to facilitate its giro business and reduce the friction to a minimum, the Reichsbank has special printed forms prepared for the various kinds of transactions, the use of which is made compulsory on the public. For a simple transfer of money from one customer to another, whether they be in the same town or in different places, the "red check" is employed, which is filled out by the party making the transfer and handed in to the bank. It is not a check in the proper sense of the term, but is so called because the printed forms resemble checks and are put up in books in the same way as checks. The word "check" does not occur in the printed matter of the blank; neither is the instrument transferable. When a number of payments are made simultaneously the party making the transfers is furnished with a blanket form on which the names of the individual firms and the various sums are entered and which has to be accompanied by a red check covering the aggregate amount. For the so-called "great banks" of Berlin, some of which have a volume of transfer transactions amounting to as much as one hundred transfers for each bank per diem, there are blanket forms which are of a different colour for each bank. When cash is wanted the so-called "white check" is employed. This is a legally constituted check. There are special printed forms for the use of those who have no account with the Reichsbank.
[186]Banks of issue were formerly numerous in Germany. Gradually, however, nearly all of them renounced the privilege of issue, as the laws relating to banking made their existence as banks of issue more and more difficult. At the present time there are only 4 such banks besides the Reichsbank, viz.: the Bayerische Notenbank, the Wurttembergische Notenbank, the Sachsische Bank, and the Badische Bank.
[186]Banks of issue were formerly numerous in Germany. Gradually, however, nearly all of them renounced the privilege of issue, as the laws relating to banking made their existence as banks of issue more and more difficult. At the present time there are only 4 such banks besides the Reichsbank, viz.: the Bayerische Notenbank, the Wurttembergische Notenbank, the Sachsische Bank, and the Badische Bank.
[187]Adapted from Robert Franz,The Statistical History of the German Banking System, 1888-1907, Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 7-115.
[187]Adapted from Robert Franz,The Statistical History of the German Banking System, 1888-1907, Publications of the National Monetary Commission, Senate Document No. 508, 61st Congress,2nd Session, pp. 7-115.
[188]Adapted from C.R. Fay,Co-operation at Home and Abroad, pp. 42-51, 56. P.S. King and Son, London. 1908.
[188]Adapted from C.R. Fay,Co-operation at Home and Abroad, pp. 42-51, 56. P.S. King and Son, London. 1908.
[189]Occasionally even as low as 1d.or less.
[189]Occasionally even as low as 1d.or less.
[190]Adapted fromInterviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2d. Session, pp. 452-468.
[190]Adapted fromInterviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2d. Session, pp. 452-468.
[191]Ibid., pp. 335-358.
[191]Ibid., pp. 335-358.
[192]Ibid., pp. 359-370.
[192]Ibid., pp. 359-370.
[193]Ibid., pp. 371-391.
[193]Ibid., pp. 371-391.
[194]Ibid., pp. 392-418.
[194]Ibid., pp. 392-418.
[195]Ibid., pp. 486, 487.
[195]Ibid., pp. 486, 487.
[196]The special interest in South American banking which exists at this time is the product of at least four distinct factors:
First. It has been evident for some years that the trade between North and South America is rapidly developing. In the ten years, 1903-1913, the exports from the United States to the ten Republics of South America increased 274 per cent. against an increase of all our exports during the same period of 73 per cent. In spite of inexperience, crude methods, lack of banks and of ships we have made notable gains in South American trade. There seems to be no reason to question the probability of a continued rapid increase during the next few years.
Second. Other forces have gradually been bringing this country more and more into the position of looking for investment opportunities abroad. While it is true that the United States is a debtor nation in the sense that a large amount (estimated at $3,000,000,000 to $6,000,000,000) of European capital is invested here, it is also true, on the other hand, that the national income has for some years been sufficient to meet annual payments abroad, to make large fresh investments in our own enterprises, and still to leave a considerable surplus for investment in neighbouring countries. It is estimated that American capital in Mexico and Canada amounts approximately to $1,500,000,000. In South America there are already American investments of perhaps $300,000,000 to $400,000,000.
As the national income and savings expand and as the opportunities for exceptionally profitable investment within this country decrease, it is clear that there must be a stronger and stronger tendency toward investment abroad. The immense sums, for instance, that have been flowing into railroad construction and rebuilding will not be needed to so great an extent in future. A considerable proportion of this overflow of capital may certainly be expected to spread into South America.
Third. The adoption of the federal reserve system has made a remarkable improvement in the handling of gold and of credit. It has released and made available for other forms of financing great sums which were formerly tied up in scattered reserves. We have only to look at the monetary history of the German Empire during the last forty years to see how powerful an influence on industry, trade, and investment is exerted by the centralisation and control of bank reserves. The LondonStatisthas calculated the ultimate increased lending power of American banks, under the federal reserve system, at $3,000,000,000.
Fourth. The European war has suddenly stimulated the tendencies which were previously evident. It has temporarily cut off a considerable amount of European trade in South America, thus leaving an opening for even more rapid development of our trade than would otherwise have taken place. It has deprived South America for a period of several years of the steady inflow of European capital. It has enormously increased the exports and decreased the imports of this country, thus placing suddenly at our disposal greatly enlarged financial power, possibly as much as $1,000,000,000 per annum above normal. Its ultimate effect, we may safely assume, must be to increase considerably rates of interest the world over, thus stimulating the tendency toward an enlarged outflow of capital from the United States into neighbouring countries.
By reason of the war the same kind of a situation that wouldotherwise have developed slowly in a period of years now confronts us suddenly when we are as yet in a state of financial unpreparedness. The new machinery provided by the federal reserve act is not yet fully utilised or adjusted in its final form. It will require careful study, combined with prompt action, to utilise the financial opportunities now before us with greatest advantage to all concerned.
Although English interests have share holdings in other institutions, there are only five banks in South America that stand out as unmistakably British. In the order of their development, these are the London and River Plate, London and Brazilian, British Bank of South America, Anglo-South American Bank, and Commercial Bank of Spanish America. Each institution, with one exception, has concentrated on one country, in which it has established most of its branches and to which it has devoted its first efforts. The exception is the British Bank of South America, which has followed the contrary policy of having only a few branches strategically located in important cities; in other words, this bank has concentrated on selected cities rather than on a given territory.
The development of commercial banking by British interests has everywhere gone hand in hand with the development of British investment and British trade. The accounts of the railways, mercantile firms, steamship lines, public utilities, and other enterprises conducted by their fellow countrymen form the great bulk of the business of the four leading institutions; the Commercial Bank of Spanish America is, however, operating under different conditions. Indeed, it may even be said—again speaking in broad terms—that the English banks have made comparatively little effort to secure the accounts of domestic enterprises. It is certainly safe to say that they have not made efforts in this field at all comparable with the efforts of the German, Spanish, French, and Italian banks. It is interesting to note also in this connection that the managementand even the clerical force are, with few exceptions, brought over from England. After more than fifty years the three leading institutions remain as distinctively British as they were at the beginning.
To understand the energetic development of German banks in South America during the last forty-five years we must consider the conditions prevailing in Germany during that period and the strong forces working toward industrial and banking expansion.
Beginning immediately after the Franco-Prussian War of 1870-71, German industrial interests, with the strong support of the German Government, began to struggle more vigorously and more effectively than ever before for a larger share of trade in international markets, particularly in the Far East and in South America. It was clearly realised that Germany needed a large and rapidly growing export trade in order to maintain her own prosperous development. In order to get this trade it was necessary to follow a definite programme which included the provision of better shipping facilities and of better facilities for financing. Up to that time Germany had been fully as dependent as the United States is to-day upon foreign ships and foreign banks.
It was also clearly realised that the tendency was toward large scale production in most industries and that those concerns which could secure large sales in the world-wide markets would soon come to enjoy an overwhelming advantage over smaller competitors. The German industries, in conjunction with the great German banks, began to follow, therefore, a programme of concentration, which has since gone steadily forward.
These two forces—expansion in foreign markets and concentration at home—have had a controlling influence on Germany's foreign trade, and incidentally on her foreign banking.
Another influence of importance is the fairly well-marked division of German industrial interests into a small number of groups, each one of which centres about and is allied to one of the great banks. To some extent this is true in other countries, especially where banking is centralised—notably in Canada, for instance—but it is especially clear and well recognised in Germany. Hence each one of the great banks is under especially strong pressure to foster and develop the interests of its important clients, even at the expense of some temporary risk or sacrifice for itself. This is doubtless the primary motive which has induced the great German banks one after another to enter foreign fields.
There is a wide-spread notion outside Germany that the German Government has itself actively intervened for the purpose of stimulating foreign trade expansion and has brought pressure to bear on German banking interests, leading them to push ahead more rapidly than their private business interests would have required. This idea may or may not be correct; so far as the writer is aware there is no special evidence pertaining to South American banking development to sustain it. At any rate, it is easy to explain the policy of these banks as being based upon purely business considerations.
As a matter of fact, there has probably been much exaggeration of the thought that the German banks are primarily self-sacrificing instruments of an ambitious national programme rather than ordinary business enterprises. The statement is frequently repeated that the English banks in South America aim first and all the time for profits, while the German banks aim for development of their national interests.
Of the four large German banks in South America only one is remarkable for energetic and successful expansion. The others have been moderately successful. The difference is to all appearances chiefly due to management.
Although these four banks were presumably designed primarily to advance the business interests of the banks which organised them, they have incidentally had a powerful influence on investment of capital and on trade. The Germanmanufacturers of machinery, steel products, and the like, have been especially helped by the ability of the German banks, both in South America and at home, to help in finding capital and in financing.
The German banks have not found political or economic conditions in South America which were insuperable obstacles to sound or profitable banking.
Other nationalities besides the English and the Germans have invaded the banking field in South America. The French, the Italians, and the Spanish have all been active, particularly on the east coast, and are represented by large institutions.
Only after the federal reserve act went into force in November, 1914, was it possible for any bank organised under the national-bank act of the United States to establish branches abroad. The act restricts this privilege to institutions having capital and surplus of $1,000,000 or more, and gives the Federal Reserve Board discretion to withhold its consent. Up to this writing the only institution which has taken advantage of the powers granted by the federal reserve act to enter South America is the National City Bank of New York, which has established branches in Buenos Aires, Montevideo, Rio de Janeiro, Santos, and São Paulo. Other branches will probably be established in the near future. Especial attention is being given to the collection of credit information. The bank also maintains a foreign trade department, which gives information and advice to its depositors as to building up business abroad. This department is now equipped to make specific reports on trade openings in Argentina, Uruguay, Brazil, Colombia, and Venezuela.
The Buenos Aires branch, which was the one first established, is understood to have done a satisfactory amount of exchange business. It stood ninth in volume of clearings in January, 1915, among the twenty-odd commercial banks ofthat city. The other branches have not been in operation long enough to show clear results. The branches in Argentina (including the subbranch at Montevideo) and Brazil have each $1,000,000 allocated to them—though this is purely formal, as the bank's whole capital and surplus are behind the obligations of every branch.
The expansion of the National City Bank in South America has been much more rapid than that of any preceding institutions, including even the aggressive German banks. As a natural result, there is apparently less effort at this stage to build up local connections and influence in each city. So far the policy of the National City Bank appears to be to furnish foreign trade facilities to American exporters over as wide a territory as possible, rather than to concentrate its activities in any restricted region.
Other national banks in this country are known to be desirous of aiding in the financing of foreign trade, but have not up to this time found it practicable to take action under the provisions of the banking law as it now stands.
There are many important and successful banks in South American countries which are strictly domestic institutions, not only incorporated under the laws of the country in which they do business, but owned and managed by local interests. The notion sometimes seriously put forward that South American banking is almost wholly in the hands of foreigners is quite unfounded. It is true that trading operations are generally handled either by foreign houses or by houses in which there is a strong foreign influence and that the financing of nearly all foreign trade and of much local trade is likely to go to foreign banks. But the accounts of the rest of the domestic trading firms, of land owners, and of governmental corporations, as a rule, gravitate toward the domestic banks.
Following is an approximate statement of the total of deposits and credits in account current in each South American country on or about December 31, 1913, and an estimate of the distribution between foreign and domestic institutions: