13 Bank Executives Headed to Jail in MPS conspiracy case

Ex-Deutsche Bank, Nomura Officials Get Jail Time in Monte dei Paschi Collusion Case

Finance Banca Monte dei Paschi di Siena

Ex-Deutsche Bank, Nomura Officials Get Jail Time in Monte dei Paschi Collusion Case

By 

Sonia Sirletti

, 

Sergio Di Pasquale

, and 

Bloomberg

November 8, 2019

Monte dei Paschi is the world's oldest continuously existing bank, founded in 1472.Bloomberg Bloomberg via Getty Images

Italy took a hard line against bankers involved in helping Banca Monte dei Paschi di Siena SpA falsify its accounts, sentencing 13 executives and managers to jail terms and fining the banks that worked with the Italian lender.
Monte Paschi ex-Chairman Giuseppe Mussari was sentenced to 7.6 years in prison. Deutsche Bank officials Michele Faissola and Michele Foresti and Nomura’s Sadeq Sayeed, Raffaele Ricci also received jail terms. Deutsche Bank and Nomura face fines and seizures totaling about 160 million euros ($176 million) for their roles.

Monte dei Paschi’s managers were accused of colluding with Deutsche Bank and Nomura bankers to hide losses at the Italian lender by using complex derivatives trades, dubbed Santorini and Alexandria, that led to a misrepresentation of its finances between 2008 and 2012. Paschi reached a plea-bargain deal in 2016 in one of the highest profile European banking cases in the last decade, first revealed by Bloomberg News.

A spokesman for Monte dei Paschi declined to comment.
All of the 13 suspects from the three banks received prison terms, including Antonio Vigni, Monte Paschi’s former general manager and ex-CFO Daniele Pirondini. The court convicted two of the group of managers despite the prosecution calling for their acquittal.
Prosecutors argued that the complex transaction Deutsche Bank helped put in place in 2008 hid about 430 million euros of losses that Paschi was facing on a previous deal, while Nomura’s derivative hid more than 300 million euros of losses not reported in the bank’s 2009 income statement.
Both transactions were carried out to cancel previous losses by building up two-leg deals, with one leg granting Monte Paschi an immediate gain and the other loss-making one designed to last for several years in order to pay back the investment banks for the gains realized by Paschi on the first one, according to prosecutors.

In 2017, the Italian government bailed out Monte dei Paschi to the tune of 5.4 billion euros.

The judge also ordered the prosecutor to investigate some of the witnesses who testified during the trial, including former Deutsche Bank official Stefano Dova.
Giuseppe Iannaccone, the lawyer defending former Deutsche Bank executives in Monte Paschi case, said in statement he’s “shocked” by the ruling and fully convinced of his clients’ innocence.

“We are disappointed with the verdict,” Frankfurt-based Deutsche Bank said in a statement. “We will review the rationale for it once it is published.”
Deutsche Bank defendants in previous hearings had rejected the allegations of a deliberate effort to hide losses, saying that Santorini was a legitimate deal and carried risk, and was not designed as a sure-fire bet.

Nomura’s lawyers also argued that the Alexandria deal was legitimate and an attempt to mask losses. Monte Paschi’s lawyers also rejected the allegations against their defendants, arguing that the deals were conceived to boost Monte Paschi’s interest margin and reduce previous risks.

Undermined by souring loans and derivatives deals that backfired, Monte Paschi requested state aid in 2017. The Italian government stepped in to take a stake of about 68 percent, injecting 5.4 billion euros in aid as part of an 8.3 billion-euro recapitalization.

Defendants convicted and their roles at the time of the transactions include:

Ex-Deutsche Bank:
Michele Faissola, head of global rates: 4.8 years
Michele Foresti, head of structured trading: 4.8 years
Dario Schiraldi, head of European sales: 3.6 years
Marco Veroni, account manager: 3.6 years
Ivan Dunbar, co-head of global capital markets: 4.8 years
Matteo Vaghi, head of Italian sales: 3.6 years

Ex-Nomura:
Sadeq Sayeed, CEO of Nomura Europe subsidiary: 4.8 years
Raffaele Ricci, head of sales for Europe, Middle East: 3.5 years

Ex-Monte de' Paschi:
Giuseppe Mussari, Chairman: 7.6 years
Antonio Vigni, General Manager 7.3 years
Daniele Pirondini, CFO: 5.3 years
Gianluca Baldassarri, head of finance division: 4.8 years
Marco Di Santo, head of asset liabilities management division: 3.6 years

A systemic global failure in all the major auditing firms

NOT GUILTY

Extracted from:

Bean Counters: The Triumph of the Accountants and How They Broke Capitalism

Enron was one of dozens of major accounting scandals to emerge in the early years of the twenty-first century, as an economic downturn exposed the 1990s numbers game for the accounting scam it was. The Houston oil company wasn’t even the largest. That distinction went to WorldCom, a telecoms company also audited by Arthur Andersen that brazenly misrepresented expenses as investments in assets before being exposed by another female accounting whistleblower, internal auditor Cynthia Cooper, who refused to be silenced by corrupt bosses. The company went bust eight months after Enron with the loss of 30,000 jobs and $180bn of investors’ money. Demonstrating how the fallout from accounting fraud could spread, its competitor AT&T had not long before sacked 20,000 people in order to match WorldCom’s bogus profits. Arthur Andersen & Co. could be blamed for those lost livelihoods too.

It wasn’t just Andersen clients either. Security company Tyco inflated income by $500m under PricewaterhouseCoopers’ nose. All were playing the same stock market numbers game. The chief executives of these three companies went to jail, as did their chief financial officers (who, incidentally, had all been garlanded by CFO magazine just like Andrew Fastow).

The other big firms had their disasters too, notably Deloitte at cable TV company Adelphia and power company Duke Energy; Ernst & Young at corrupt healthcare company HealthSouth; and KPMG at photocopier company Xerox.

They would, however, get away with paying some affordable civil penalties to the SEC without admitting wrongdoing. The regulator was typically damning and lenient at the same time in the Xerox case, finding that ‘KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion “gap” between actual operating results and results reported to the investing public...

Most of Xerox’s topside accounting actions violated generally accepted accounting principles (GAAP) and all of them inflated and distorted Xerox’s performance but were not disclosed to investors.’ Deliberately breaking the accounting rules sounded pretty serious. But then came the generous resolution. KPMG had to cough up $22m in ill-gotten gains and penalties ‘without admitting or denying the SEC’s findings’. (43)

Apart from Andersen, all the (now) Big Four firms thus emerged from the numbers-game era without guilt. A handful of individuals were fined and some suspended from practice. But when it came to the firms themselves, the prospect of one of them joining Andersen in whichever circle of bean-counting hell it now inhabited – reducing the profession to an untenable Big Three – ensured that the regulators backed off from alleging law-breaking.

With the WorldCom fraud emerging so soon after Enron, and European and other scandals demonstrating a systemic global failure in all the major firms, it was impossible any longer to deny that major change was needed in the accountancy profession. A few new rules did indeed emerge. But they didn’t address the most dangerous fault line exposed and even entrenched by the age of scandal. Through their own misconduct and by selling out their heritage, the accountants had themselves become all but unaccountable. Responsibility-free bean counting was about to exact its heaviest price yet.

Notes:

43. ‘KPMG Pays $22m to Settle SEC Litigation Relating to Xerox Audits’, SEC press notice, 19 April 2005.

Behbahan branch of the Central Bank of Iran set on fire

IFRS: Holdings of Cryptocurrencies, Committee’s agenda decision

Committee’s agenda decisions

https://www.ifrs.org/news-and-events/updates/ifric-updates/june-2019/#8

The process for publishing an agenda decision might often result in explanatory material that provides new information that was not otherwise available and could not otherwise reasonably have been expected to be obtained. Because of this, an entity might determine that it needs to change an accounting policy as a result of an agenda decision. The Board expects that an entity would be entitled to sufficient time to make that determination and implement any change (for example, an entity may need to obtain new information or adapt its systems to implement a change).
The Committee discussed the following matters and decided not to add them to its standard-setting agenda.

Holdings of Cryptocurrencies—Agenda Paper 12

The Committee discussed how IFRS Standards apply to holdings of cryptocurrencies.
The Committee noted that a range of cryptoassets exist. For the purposes of its discussion, the Committee considered a subset of cryptoassets with all the following characteristics that this agenda decision refers to as a ‘cryptocurrency’:

1. a digital or virtual currency recorded on a distributed ledger that uses cryptography for security.
2. not issued by a jurisdictional authority or other party.
3. does not give rise to a contract between the holder and another party.

Nature of a cryptocurrency

Paragraph 8 of IAS 38 Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset without physical substance’.
Paragraph 12 of IAS 38 states that an asset is identifiable if it is separable or arises from contractual or other legal rights. An asset is separable if it ‘is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability’.
Paragraph 16 of IAS 21 The Effects of Changes in Foreign Exchange Rates states that ‘the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency’.
The Committee observed that a holding of cryptocurrency meets the definition of an intangible asset in IAS 38 on the grounds that (a) it is capable of being separated from the holder and sold or transferred individually; and (b) it does not give the holder a right to receive a fixed or determinable number of units of currency.

Which IFRS Standard applies to holdings of cryptocurrencies?

The Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 to holdings of cryptocurrencies. The Committee considered the following in reaching its conclusion.

Intangible Asset

IAS 38 applies in accounting for all intangible assets except:

1. those that are within the scope of another Standard;
2. financial assets, as defined in IAS 32 Financial Instruments: Presentation;
3. the recognition and measurement of exploration and evaluation assets; and
4. expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.

Accordingly, the Committee considered whether a holding of cryptocurrency meets the definition of a financial asset in IAS 32 or is within the scope of another Standard.

Financial asset

Paragraph 11 of IAS 32 defines a financial asset. In summary, a financial asset is any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right to receive cash or another financial asset from another entity; (d) a contractual right to exchange financial assets or financial liabilities with another entity under particular conditions; or (e) a particular contract that will or may be settled in the entity’s own equity instruments.
The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash (see below). Nor is it an equity instrument of another entity. It does not give rise to a contractual right for the holder and it is not a contract that will or may be settled in the holder’s own equity instruments.

Cash

Paragraph AG3 of IAS 32 states that ‘currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability’.
The Committee observed that the description of cash in paragraph AG3 of IAS 32 implies that cash is expected to be used as a medium of exchange (ie used in exchange for goods or services) and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements.
Some cryptocurrencies can be used in exchange for particular good or services. However, the Committee noted that it is not aware of any cryptocurrency that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Consequently, the Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.

Inventory

IAS 2 applies to inventories of intangible assets. Paragraph 6 of that Standard defines inventories as assets:

1. held for sale in the ordinary course of business;
2. in the process of production for such sale; or
3. in the form of materials or supplies to be consumed in the production process or in the rendering of services.

The Committee observed that an entity may hold cryptocurrencies for sale in the ordinary course of business. In that circumstance, a holding of cryptocurrency is inventory for the entity and, accordingly, IAS 2 applies to that holding.
The Committee also observed that an entity may act as a broker-trader of cryptocurrencies. In that circumstance, the entity considers the requirements in paragraph 3(b) of IAS 2 for commodity broker-traders who measure their inventories at fair value less costs to sell. Paragraph 5 of IAS 2 states that broker-traders are those who buy or sell commodities for others or on their own account. The inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin.

Disclosure

In addition to disclosures otherwise required by IFRS Standards, an entity is required to disclose any additional information that is relevant to an understanding of its financial statements (paragraph 112 of IAS 1 Presentation of Financial Statements). In particular, the Committee noted the following disclosure requirements in the context of holdings of cryptocurrencies:

1. An entity provides the disclosures required by (i) paragraphs 36–39 of IAS 2 for cryptocurrencies held for sale in the ordinary course of business; and (ii) paragraphs 118–128 of IAS 38 for holdings of cryptocurrencies to which it applies IAS 38.
2. If an entity measures holdings of cryptocurrencies at fair value, paragraphs 91–99 of IFRS 13 Fair Value Measurement specify applicable disclosure requirements.
3. Applying paragraph 122 of IAS 1, an entity discloses judgements that its management has made regarding its accounting for holdings of cryptocurrencies if those are part of the judgements that had the most significant effect on the amounts recognised in the financial statements.
4. Paragraph 21 of IAS 10 Events after the Reporting Period requires an entity to disclose details of any material non-adjusting events, including information about the nature of the event and an estimate of its financial effect (or a statement that such an estimate cannot be made). For example, an entity holding cryptocurrencies would consider whether changes in the fair value of those holdings after the reporting period are of such significance that non-disclosure could influence the economic decisions that users of financial statements make on the basis of the financial statements.

Central banks doctoring the press: the Italian case

Central banking and fake news
Anti-Deflation League worried about the Italian central bank doctoring the news

Ignazio Visco, governor of Banca d'Italia, not to be confused with the other pundit Vincenzo Visco

ADL in Rome, November 18, 2019 - Recently two cases of the Italian central bank actively doctoring the press were discovered:

- The case of the Italian newspaper IlSole24Ore:
http://centralerischibanche.blogspot.com/2019/11/banca-ditalia-e-il-segreto-di-sistema.html

- The case of Reuters:
http://centralerischibanche.blogspot.com/2019/11/bankitalia-chiama-reuters-ancora-una.html

The ADL NGO - where ADL stands for "Anti-Deflation League" - is worried that a central bank is active in the business of fake-news and doctoring the financial press, thus doing 'whatever it takes' to confuse the public.

The Italian secretary of the ADL, the forensic accountant Marco Saba, recently told to the press: "We are puzzled that an institution as old as the Italian national debt is not only able to falsify his annual financial statement, like every other ordinary Italian bank, but is also proactively in the business of dictating to the press what to publish to misinform the public." 

And he continues: "In Italy this spin-doctoring work was traditionally reserved to the Grand Master of an irregular masonic lodge: Licio Gelli of the infamous P2 was a clear example. Another recognized influencer is the American Embassy in Rome - as the whitewash on the case of depleted uranium weapons clearly shows. But the Italian central bank goes as far as to try to forbid the secular activity of scriptural money creation. That's amazing. We call for the Italian PM to clarify who is the officially authorized troll when it comes to misinforming the public, as soon as possible."

The premier Conte was unavailable to comment the issue, while the governor of Banca d'Italia was busy trolling another news.

REFORM PROPOSAL CONCERNING BANK DEPOSITS (RIESSER, 1910)

Dr. Riesser, German Big Banks and Their Concentration in Connection with Germany’s Economic Development, 3rd edition, Jena, 1910 
(PP. 546-601)
https://socialsciences.mcmaster.ca/econ/ugcm/3ll3/riesser/GreatGermanBanks.pdf

SECTION 8 - REFORM PROPOSAL CONCERNING BANK DEPOSITS AND THEIR JUSTIFICATION

I. GENERAL OBSERVATIONS (506 a).

It was pointed out in an earlier chapter how the German banks developed hand in hand with the scanty means of the German people and in accordance with the demands of German trade and industry. In England a different development took place, which, while in equally close touch with English requirements and the given concentration in the fields of distribution, credit, and national wealth - all of which was entirely lacking in Germany - led from the outset to a sharp differentiation between the deposit banks and other banks. This is sufficient ground for a large number of Germans, who are wont to underrate domestic as compared with foreign achievements, to point to the English system as the only true one, and to demand its unrestricted adoption at home. Similar views are, however, held in certain notable scientific quarters. It is particularly Adolph Wagner who has been advocating for a long time a reform along English lines, based in his case upon scientific conviction, which, as is well known, is least apt to change under the influence of mere practical experience. To my mind it was a fortunate fact that the German banks, from the very start, placed themselves at the particular service of trade and industry. But at all events it will be granted that this was due to the historically given German conditions and requirements. As a result of this connection the banks have taken a considerable part in the splendid industrial and commercial development of the country, which is characteristic of the last decades. Starting at a time when domestic agriculture was no longer in a position to provide sufficient food and work for the greatly increased population the German banks contributed indirectly toward transforming Germany from an agricultural country, if not into an exclusively industrial and commercial country at least into one where these two economic interests are of preponderant importance. This is sufficient to arouse against the banking interest all those who detest the whole trend of "industrialization." The charge is made against the banks that through their deposit system they deprive agriculture of considerable funds, which they use instead for the support of industry, especially of the export industries. Political circles sharing these views are supported in this campaign by the extremists on the opposite side - i. e., the social democrats, who oppose the banks as the most powerful and dangerous representatives of movable capital. 
 A regrettable feature of German banking in common with other industries is the gradual ousting of small enterprises by large-scale enterprise. This development has caused a number of members and spokesmen of the "middle classes" (in this case the smaller bankers - for instance, Caesar Straus) to attack the German banks on the ground that they were pursuing an altogether wrong course. Notwithstanding the heterogeneity of political and economic views and the great variety of motives and mutually exclusive purposes of those who have been advocating "reform" in the field of deposits during the last few decades, there is unanimity on one point, namely, that "something must be done" that in some way or other the funds flowing to the banks should be diverted in a larger degree to agriculture, or "national economic ends," to use the more popular catchword. As soon, however, as practical proposals are called for, various currents and parties appear with often obscure and contradictory demands, despite the fact that the several parties and assailants very often contrive to veil their true ends and purposely move in separate columns with the view, however, of combined attack. Moreover, each time a crisis occurs, an event which can hardly ever be avoided in economic life under any banking system, there appear on the scene any number of patented critics or persons who have become experts overnight, who, to say the least, try to impress the public that had the German banking system been intrusted to their care it would have worked faultlessly, and who use such favorable occasions to prove their capacity of "saving the country" by means of the most radical proposals. 

 1. SAFETY OF DEPOSITORS - A REASON FOR REFORM PROPOSALS.  

The majority of known reform proposals hitherto made are based on the following considerations:  
The German banking system, which, unlike the English system, combines the issuing of securities and speculating activity on own and outside accounts with the receiving of money deposits endangers, of necessity, the safety of the deposits. These are intrusted to the banks with the confidence in their absolute security. The banks, however, use them in providing the means for their own enterprises and for speculation in securities on outside account. 507 In Germany the detrimental effects of such a system have already become evident in a marked degree through overspeculation, excessive security issues, 508 crises, 509 and bankruptcies, which have caused great losses to depositors. 

 2. THE PARTICULAR PROPOSALS, MADE WITH THIS END IN VIEW BY CAESAR STRAUS, OTTO WARSCHAUER, AND COUNT VON ARNIM-MUSKAU.  

We are therefore urged to adopt the British banking system. The latter, it is said, provides for a strict division of the field and for the complete divorce between
stock exchange and deposits, and thus guarantees the safety and prudent administration of the moneys deposited. In other words, it is imperative to effect a complete separation between the deposit business and the issue and flotation business. This is the general trend of the proposals of the late Caesar Straus, a former private banker in Frankfort-on-the-Main, and of Otco Warschauer.
Straus advocates the establishment of a central deposit bank for the whole German Empire by private means, but under government supervision, with a capital of 60,000,000 marks, of which 25 per cent, that is, 15,000,000 marks, is to be paid in; the bank to maintain branches in all important trade and money centers and to transact business in other places through the intermediary of the Reichsbank. 510
Warschauer advocates the establishement of a Reichsdepositenbank (Imperial Deposit Bank) with a share capital of 50,000,000 marks, of which 50 per cent, that is, 25,000,000 marks, is to be paid in. Alongside this imperial institution, deposit banks for the individual States might be founded, which would bear the same relation to it as the present private note banks do to the Reichsbank.511 The proposed institution, just as the Reichsbank, should follow a plan of decentralizing its operations through the opening of a large number of local offices in the various confederated States. He presages for the proposed central deposit bank, the deposits of which, in his opinion, would reach the total of at least 1,000,000,000 marks, a dividend of 21 to 22 per cent ("an extremely low estimate," as he expresses himself).  
 Judging by the average profits of the London stock banks, he assumes as "extremely probable" a dividend in the long run of 12 per cent. The above prediction may possibly explain the fact that, according to Warschauer, the proposed deposit banks are to be permitted to acquire first-class mortgages as well as to advance money on industrial securities and bank shares, to be sure with the limitation that only "first-class securities" are to be considered. This he thinks will cause a gradual defection of depositors from the credit banks. The latter, in his view, represent merely private interests with no claim to special protection by the Empire, and through their alertness will undoubtedly soon find new and perhaps even more profitable fields of operation.512  
At the same time both Warschauer and others before and after him made a number of substitute proposals to be applied to those of the existing banks which receive deposits. Most important among these are the following: The proportion of deposits, in so far as they are savings deposits,513 to the share capital - in other words, the maximum amount of deposits a bank might be permitted to receive should be fixed by law at about 200 per cent of the share capital, as against 50 per cent, which is the legal maximum for mortgage banks, since the smaller the working capital the less secured were the rights of the creditors.  
Furthermore, the principle of publicity should be adopted more largely than heretofore with regard to "savings deposits" (Spareinlagen), which should be stated separately in the balance sheets either by all 514 banks, banking associations with limited liability, and mutual credit societies,515 or by such professional depositaries, who receive the funds of the general public to the extent of 50 per cent over and above their own invested capital, who carry on a flotation and speculation business, or who participate in industrial undertakings,516 which would again be inclusive of all present-day banks and even bankers. All of them should be held to publish quarterly (as proposed by Count v. Arnim-Muskau before the Bourse Law Committee under date of March 10, 1896) or monthly reports, the form of which should be fixed by law, and which should also state the percentage of savings deposits to share capital.  

These summary balance sheets should state:  

(a) The total amounts of undertakings or flotations on own or outside account. 

 (b) The total liabilities on the date of the statement on account of participations or undertakings of any kind whatever. 

 (c) The amounts of stock held apart from securities of other classes.  

(d) The amounts used for contango or collateral credit.  

(e) The total liabilities incurred through the hypothecation or "carrying over" (Reportierung) of securities and participations owned by the bank or through the hypothecation or "carrying over" of securities and participations owned by outsiders. 

 Other proposals include the demand, either that the savings deposits, as in the case of the national banks in the United States, should be granted a prior lien as over other creditors 517 or else that a certain percentage of the deposits should be invested in a special manner to be prescribed by law.  

 3. REFORM PROPOSAL BASED ON OTHER CONSIDERATIONS.

Under this head comes the recent proposal made by Heiligenstadt, the president of the Prussian Zentral- genossenschaftskasse (Central Bank of Mutual Credit Societies). Without desiring to prejudice further necessary legal enactments, and pointing to American regulations, he demands that at least a beginning of legal regulations be made by requiring that "whoever makes a profession" of lending or administering moneys shall maintain at the Reichsbank a cash reserve of I to 2 per cent of all funds held on current account or deposit.518 

 This proposal, which was advocated on nearly the same grounds also by two experts before the bank inquiry commission, is not based on the claim that the German credit banks do not present sufficient safety for their deposits, but primarily on the consideration that mainly through the fault of the banks, the proportion in German trade and commerce as a whole of invested capital to the necessary liquid working capital and the proportion of the liquid assets of the banks to their liabilities, which represent their working capital, is unsound and should be improved.  

At the same time, and perhaps even in the first place, the proposed reform, together with other measures, advocated by him, is intended, as Heiligenstadt expressly states,519 "to strengthen the operating resources of the Reichsbank" and to raise it to the position of "steward of the national reserve," with the view of providing greater security for the constantly increasing deposits on current-account and other bank deposits.520 

 It is probably in this sense that the resolution of the Tax and Economic Reform Association (Vereinigung der Steuer - und Wirtschaftsreformer) dated February 13 and 14, 1906,521 is to be interpreted, in which the imperial chancellor is requested "to provide for the legal regulation of the modes of securing the deposits at the Reichsbank (!) and other banks, especially in view of the growing proportions of the giro and deposit business ever since 1875, that is, the year of the foundation of the Reichsbank.  
So far as the Reichstag is concerned it confined itself until the present to point out the presumed insecurity of the deposits by passing on June 17, 1896, the following resolution, proposed by one of its committees: 

 Whereas the professional use by banks and business men of current account- and other deposits urgently demands protective measures in the interests of the depositors, the Chancellor is requested to inquire into the subject with the view of ascertaining how such measures can best be taken, to examine the principles underlying the present draft and the accompanying report, and to lay before the House as soon as practicable a bill in regulation of the matter.  

4. CONSIDERATIONS ON WHICH THE FIRST-NAMED REFORM PROPOSALS ARE BASED.  

Before proceeding to a critical discussion of the individual reform proposals, it seems proper to inquire whether reforms in the field of bank deposits - that is, protective measures in the interests of depositors - are at all necessary or even urgent in the present state of affairs or in view of past experience. It is such measures that are advocated in the first batch of proposals, mentioned on page 550 and following and in the Reichstag resolution. 

 (a) SUPPOSED SUPERIORITY OF THE ENGLISH BANKING SYSTEM.  

It has been asserted repeatedly that the English banking system, with its division of labor between deposit banks proper and other banks engaged also in the flotation and underwriting business, necessarily presents a larger degree of security for depositors, as compared with the German "mixed " system. For the underwriting and flotation business, it is argued, as is amply proved by the experience of the various countries, carries with it great dangers, which in the case of the regular banking business do not exist at all, or at least, only to smaller extent.  

As a matter of fact, however, it has been incontestably proven, especially by Ad. Weber and Edgar Jaffé that it is precisely the English deposit banks - not to mention the most recent experience of the American note banks - which despite their theoretic superiority have in practice shown the most serious evils and abuses. 

 It is true, that the English joint-stock companies, conforming to theory, have abstained in a direct way from flotations and the underwriting business as well as from bourse speculation. But this very fact causes another great evil, namely, that the banks have never shown any interest in the newly founded companies or in the securities issued by these companies, while it is a distinct advantage of the German system, that the German banks, even if only in the interests of their own issue credit, have been keeping a continuous watch over the development of the companies, which they founded.

On the other hand the English banks have been promoting stock exchange speculation, company flotations and security issues to an alarming extent by their practice of placing at the disposal of the larger jobbers and dealers their daily surplus money against the hypothecation of securities of all kinds.522  This went so far that the Journal of the Institute of Bankers referring to this practice in its issue of October, 1899, page 409, used the following strong terms: "Nearly the whole of the professional speculation on the Stock Exchange is carried on with bank money."  
Among the securities hypothecated during the last decade there was an enormous number of gold-mine and American railway shares, which during critical times can either not be realized at all or only at great sacrifice; thus it is just in critical times that the joint-stock banks have had to fall back for assistance on the Bank of England.523 During critical times therefore the joint-stock banks have to depend upon the "single-reserve system," that is, upon a system, which even English authorities have long ago condemned as inadequate and dangerous, the more so as the Bank of England in turn is lending out the funds deposited with it.524  It is these large sums, indirectly placed at the disposal of the stock exchange and speculators, which in the statements of the joint-stock banks constitute the largest part of the item "money at call and short notice." 525  

In Germany these sums would figure under the head of "Reports and Lombards," whereas Caesar Straus, strangely identified them with the item "Kupons und Sorten" (coupons and specie) of the German balance sheets, and therefore regards them as perfectly harmless.526

It is these amounts loaned by the deposit banks and looking so innocent in the summary balance sheets, which are mainly responsible for the conditions, which Edgar Jaffé 527 characterizes in the following caustic expressions:  
Nowhere are there so many swindling promotions as on the London Stock Exchange, nowhere else has the general public lost such enormous sums. 

 On the other hand it is also a fact  528  which I believe to have amply proven in another work of mine,529 that during the great crises, through which England, like other countries, has had to pass, an alarmingly large number of deposit banks have failed.  

It may also be shown that in other respects as well the much-vaunted merits of the English joint-stock banks are but illusory. The paid-up capital of the English deposit banks is extremely small, both taken by itself as well as in proportion to the liabilities.  
In 1904 it amounted for 87 deposit banks to 65,250,000 pounds sterling in round figures, equal to 1,305,000,000 marks, or an average of only 15,000,000 marks per bank. On the other hand the proportion of surplus funds to the paid-up capital, but not to the total liabilities is shown to be exceedingly high, ranging between one-half to two-thirds and even up to 100 per cent. This is the sole cause, why even with small gross profits the banks have been able to declare the high dividends 530 (on their paid-up capital, of course) to which Warschauer refers, though advocating a much larger paid-up capital for his proposed Imperial deposit bank.  

Finally Jaffé 531 showed that "with the exception of a small number of the very best banks, which have a cash-reserve of 5 to 10 per cent, the English deposit banks kept
no amounts on hand, which may be regarded as reserves in the above sense." 
 In view of the large amount of time deposits and deposits on current account and the small paid-up capital of the English deposit banks, Jaffé rightly considers it impossible to class under this head the item "money at call" (contango - and other loans to bill-brokers and on exchange), since a portion of the money lent out on the stock exchange could not be realized in the event of a panic.  

Neither can the item "cash" (i. e., cash on hand plus credits at the Bank of England), the only one that might be regarded as reserve, be classed as such in its entirety, since part of it is absolutely necessary for the daily use of the hanks themselves. But even this, he emphasizes expressly, is probably too favorable a picture, since, according to his experience, a large number of the English deposit banks - and some of the largest banks are the worst offenders in this regard - in order to make the item "cash on hand " appear as large as possible in their public statements, withdraw from the market large amounts at the end of each month and particularly at the end of each half year. 532 

 It may be said, though, that this statement no longer holds true for the most recent time, since under the pressure of public opinion and following the example of the leading institutions, nearly all the English deposit banks maintain at present reserves in the above sense which amount from 10 to 15 per cent of the liabilities. It may thus be seen how far the practical operation of the English system justifies the enthusiasm for it as a model to be adopted by us.  

We shall now take up the discussion of the reform proposals, which start with the assertion that the German banks do not accord sufficient security to their depositors, and examine the validity of the underlying assertions that in Germany, as distinct from England, the proportion of share capital and reserves to liabilities, also the proportion of liquid assets to immediately or shortly due liabilities, is far too small; further, that deposits are used in Germany for syndicate business and stock speculation, and finally that the combination of the deposit business with the underwriting and issuing business has caused great injury to the public. We shall start with the first and most prevalent charge. 

 (b) THE ALLEGED SMALL OWN RESOURCES (SHARE CAPITAL AND SURPLUS) OF THE GERMAN CREDIT BANKS AS COMPARED WITH THEIR LIABILITIES. 

 The 169 German credit banks with a capital each of 1,000,000 marks and over, of which nearly all are holding deposits (totaling about 2,750,000,000 marks) separately mentioned in their balance sheets, show under date of December 31, 1908:

 Marks.  

Share capital.. .................................................. 2,646,000,000 
Surplus .................................................................... 607,000,000
Total own resources. ................................................ 3,253,000,000  

As against these items there stand-  

Marks.  

Credits on current account, including acceptances. ........ 4,510,000,000
Deposits ........................................................................... 2,746,000,000
Or total liabilities. ............................................................ 7,256,000,000 

 In other words, the own resources of these 169 banks constituted almost one-half of their total liabilities, including acceptances and deposits, whereas in England the paid-up capital constituted only about 10 per cent of deposits of all kinds (fremde Gelder). 533  

The 2,746,000,000 marks of deposits in the German credit banks were more than fully covered by the share capital and the surplus. 534  

As far as the eight great banks are concerned, the pro- portion between deposits of all kinds (liabilities) to share capital and to share capital plus surplus, or to the bank's own operating capital (eigenes werbendes Kapital) , may be seen from the following table  

It goes without saying that the own resources of the German credit banks have grown far less than the liabilities, for it must be borne in mind that during periods of depression, when only small dividends were paid, fresh issues of stock were altogether out of question. At all events, there was no inducement then for working with excessively large capital on which no adequate returns could be expected.  

The surplus funds alone of all credit banks steadily increased from 12.90 per cent of the share capital in 1885 to 22.90 per cent in 1908, amounting then to 6o7,070,000 marks. In the case of the Berlin banks these percentages grew from 17 per cent in 1885 to 29.10 per cent in 1908. 

 It is my opinion, however, that this splendid showing is due not so much to the superiority of our banking methods, as is thought by Ed. Wagon,535 as to the excellence of our corporation laws. These surplus funds contribute at present more than 1 1/4 per cent of the dividend earnings of all the banks and 1.73 per cent (as against 1.87 per cent in 1906) of the dividend earnings of the Berlin banks.  

It should be stated, though, that while the share capital and surplus are "guaranties," and while the increase in their size improves the financial condition of the bank and diminishes the danger of bankruptcy, yet they, as well as the part of the debits which is not required to meet the claims of creditors, are on the main guaranties for the stockholders. 

 (c) THE LIQUIDITY OF THE RESOURCES OF THE GERMAN CREDIT BANKS - COEFFICIENT OF LIQUIDITY (Liquiditätsschlüssel).  

The guaranties for the creditors, especially for the depositors, are represented in the first place by those assets in which the capital of the bank is invested, since the creditors must have assurance not merely of the solvency of the bank, but even more so, that their demand claims will be paid upon presentation and that the other claims which are due on stated terms will be met when due. In other words, the security of the creditors, especially of the depositors, depends primarily upon the amount of liquid assets which the bank possesses and the mode of their investment.536  

The liquid assets for securing the demand and short-term liabilities must be large enough and of such a kind that the bank may be able to pay without delay those liabilities, the presentation of which might be expected during a crisis. 
 The question as to what percentage is likely to be presented for payment during a crisis can be answered only according to rules of probability,537 differing according to circumstances (time, state of the market, etc.), which are learned only from practical experience, change with it, and can not therefore be fixed by law. Similarly only experience during a long period can teach what kind of assets may be regarded in a general way as liquid assets, though it is much easier to determine those which can not be so regarded.  

It is perfectly obvious, therefore, that there is no fixed method of calculating the degree of liquidity applicable at all times and places and to all institutions. Any method may and will be objected to in one point or another. There is the further drawback that the manner in which the balance sheets are drawn up have varied greatly, at least until the most recent period.   Moreover, there is no means of telling to what extent the various items which, like bills, contango, advances on collateral, may be regarded generally as liquid assets, contain amounts that are not liquid, and inversely, to what extent an item which, as a rule, does not come under the general head of liquid assets does not comprise, in any concrete instance, consols or other securities which can be quickly realized under all circumstances or at least during normal times. 
 Finally, in calculating the degree of liquidity, exact and correct results may be obtained only if a distinction is made between the daily liabilities, including commercial deposits, and those which fall due after some time, since it is only the former which require. security by means of quick assets, while the latter may be properly secured by those assets which will be realized on some future date.538  

After these preliminary remarks we may state that, according to the method most commonly used in calculating the liquidity of bank resources, the liabilities include the following items : 
- Credits on current account, including acceptances, - Deposits (Depositen),  
- Claims to net profits, undivided at the end of the business year ;  

while the liquid assets include:

- Cash on hand,  
- Contango and loans secured by collateral (the two, however, appearing in most balance sheets under one common head),  
- Bills,  
- Securities.  
- Debits on current account are not included among the liquid assets.  

There is no doubt that this method, which is followed by the daily press, especially the Frankfurter Zeitung, and special periodic publications, as the Deutscher Oekonomist, is extremely schematic, as no distinction is drawn in the case of credits on current account and deposits between those claims which are daily due and those which fall due at a later date. Nor is it borne in mind that as a rule, even during critical times, the majority of the clients will forward to the bank at maturity funds to secure the payment of their acceptances. The scheme is also faulty for the reason that it includes among liquid assets all securities - an altogether too optimistic an assumption - while it excludes all debits on current account, notwithstanding that even during critical times a great number of the debtors may be expected to pay up their due debts within reasonable time after demand.  

All these faults of classification are, however, of no serious account, since the errors are not only in favor of greater liquidity (as, for instance, when securities are included among the liquid assets) but also against its 539 (as, for instance, when all debits on current account are excluded from among the liquid assets and all acceptances are included among the liabilities), and thus compensate each other to a certain extent; also because the same methods of calculation are used in the comparison of the more recent with the older balance sheets.  

This can be proved arithmetically by changing slightly the schedule so as to avoid the errors named, for instance, by omitting acceptances from the liabilities or considering them only to the extent of one-third of the total, by including at the same time among the liquid assets debits on current account to the extent of one-half or one-third of the total, and by including not the total securities, but only one-third or 10 per cent of that total. It will be seen that even with such a change of the schedule very similar results will be obtained. 

According to the customary schedule the coefficient of liquidity - that is, the proportion of the immediately available or quick assets to all liabilities, without distinction between those daily due or those maturing after some time 540 has been as follows since 1893 : 

  
The proportion has grown constantly worse during the last fifteen years (except for the years 1896, 1897, and 1902) UP to 1907, and it is mainly this fact which supplies grist to the mills of the heterogeneous elements opposing our present banking system. 
There can be, however, no doubt that this falling off can be traced on the one hand to the strong concentration movement in banking and industry, particularly characteristic of this period, and on the other to the unexpectedly large demands of industry and the accompanying growth of speculation. It would not be difficult to trace in detail the influence of the above factors through the growth of debits on current account and the long-term credits. The working of the first factor, particularly in the shape of the so-called communities of interest, is discernible in the increase of the permanent participations; the two last factors are mainly responsible for the growth of debits on current account and of acceptances. The expectation seems, however, justified that with the abatement of the concentration movement and the strengthening of the numerous branches, agencies, etc., founded by the banks during the period, all of which make large demands upon the parent institutions until they are able to stand on their own feet, these items will show some reduction. An adverse change in industrial activity may contribute to the same result while causing a similar reduction of the bank discount and general interest rate. 

The picture presented by the balance sheets of the banks must necessarily reflect that of the entire national economy, since the banks are the cash keepers of the nation. It is, therefore, hardly in accord with the truth to speak of or object to the banks as the "leaders of national enterprise" or of domestic economic activity. 

 As it is the above table shows that the proportion of the quick assets of the banks to their liabilities or the coefficient of liquidity of their resources even for the worst year of the period (1907) was 60 per cent for all credit banks, taken as a whole, 541 and 63 per cent for the Berlin banks. That is to say, the liabilities of the Ger-man credit banks to the extent of almost two-thirds of the total were secured 542 by liquid resources.543  

The coefficient of liquidity in 1907 for 11 great Berlin banks has been calculated by Heinemann in an article in the Nation (No. 32, dated May 7, 1898) at 61 per cent, while for 1906 544 (by disregarding the item of securities) 545  he reckons it at a little over 50 per cent. Similarly A. Koppel, writing for the Plutus of May 26, 1906, figures out a decrease of liquidity for the 5 largest banks from 75 per cent at the end of 1890 to 50 per cent at the end of 1905. 
 In this calculation he fails, however, to include securities among the assets, while including among the liabilities even the so-called Avale (i. e., bank sureties for the payment of railway freights, excise, and import duties). 

 An article of the Frankfurter Zeitung, dated April 4, 1907 (No. 93), discussing the coefficient of liquidity for 45 banks (9 Berlin great banks and 36 provincial banks, each of them with a minimum capital of 10,000,000 marks), with a total nominal capital of 2,198,800,000 marks, follows the customary method (without, however, considering the net profits) and places this coefficient at 67.8 per cent for the 8 Berlin great banks, arriving thus at the same proportion of two-thirds security for the outstanding liabilities. 

 Finally, the Deutscher Oekonomist of November 23, 1907, page 561, by using the customary method of calculation, but omitting acceptances from the liabilities and securities from the liquid assets, places the coefficient of liquidity on December 31, 1906, for 143 banks, with a minimum capital of 1,000,000 marks each, also at about two-thirds (credits on current account and deposits, 6,304,000,000 marks; cash on hand, bills, and loans on collateral, 4,043,000,000 marks). Almost the same result would have been attained by reckoning in the case of these 143 banks the acceptances among the liabilities at the ratio of one-third of the total and placing with deposits and net profits the credits on current account at the ratio of one-half of the total, i. e., by considering merely the immediate liabilities (as distinct from those maturing after some time), according to the average ratio between the two and by including among the liquid assets, besides cash on hand, bills, and loans on collateral, including contango, also one-third of the securities, but excluding from the liquid assets any debits on current account. The amounts thus obtained are 7,394,000,000 marks of liabilities, as against 4,406,000,000 marks of quick assets.  

These results tally fairly well with the coefficient of liquidity of 62.76 per cent, which Waldemar Mueller assumed for 45 banks with a minimum capital of 10,000,000 marks each, at the Hamburg bankers' convention, although he counted among the liquid assets one-half instead of one- third of the securities and omitted the net profits, but, on the other hand, placed among the liabilities all credits on current account. By excluding the total of acceptances from the liabilities, which I regard, however, as improper, he obtained an even higher coefficient of liquidity of 81.92 per cent. 

 It will hardly be denied that the coefficient of about two-thirds obtained by the various methods, even for the worst year, unless the methods used were altogether arbitrary, is sufficiently satisfactory, although in this regard conditions in the English banks, for reasons already stated, are far more favorable. But even for the German credit banks the coefficient would be far more favorable if we compared their quick assets merely with their immediate liabilities. This, however, is impracticable, at least for the present, since the balance sheets of many banks contain no information on that point.  

The composition of the liquid assets may likewise be regarded, on the whole, as satisfactory. 
 On December 31, 1908, cash on hand in all banks amounted to 537,500,000 marks,546 i. e., almost to 8 per cent of the 7,256,000,000 marks, the combined credits on current account and deposits, exclusive of acceptances. 
 In England, as we saw, even the best joint-stock banks show a cash reserve of only 5 to 10 per cent, whereas the majority of the banks have no amounts which may be regarded as reserves in the sense used by Edgar Jaffé. In the case of the German banks, the item cash is supplemented by the bill holdings, which on an average 547 present a very satisfactory amount, amounting to 2,742,400,000 marks, on the above date, so that on December 31, 1908, the items cash and bills alone constituted 3,279,900,000 marks, as against deposits of 2,745,800,000 marks. 

 The statement was made and assiduously propagated in the foreign press that part of the funds entrusted to the banks, and even part of the deposits, are being used in syndicate operations or speculation. This is refuted by the mere fact that at the end of 1908 the combined total of the items - securities, mortgages, and syndicate participations - in the case of the above-mentioned 143 (169 in 1908) credit banks, with a minimum capital of 1,000,000 marks each, was 1,298,052,000 marks, or less than one-third of the combined capital and surplus funds of these banks, viz, 3,253,673,000 marks.548 About two-thirds more of this amount would therefore have to be invested in this manner before there could be any talk that outsiders' funds, not to speak of deposits, were invested in speculative securities or participations.

The above, it is hoped, will afford sufficient proof that neither the amount nor the composition of the liquid resources, nor the coefficient of liquidity afford any cause for demanding the "reform" of our banks for the sake of increasing the security of the deposits. Finally, the statement, that the combination of the deposit business with the promoting and issuing business has led to grave losses, is correct only to the extent that in a number of failures of credit banks as well as cooperative credit societies and private banking firms depositors have also suffered. So far as private firms were concerned, these failures were brought about by the criminal acts of the bank management, which had no connection whatever with promoting or issuing transactions. Similar experience, only on a larger scale, was had with the English deposit banks and is not likely to be avoided through any legal regulations.  

The figures of such losses as given by Otto Warschauer 549 brought down to the year 1907 by the managing partner of the Disconto-Gesellschaft, Dr. Arthur Salomonsohn, were presented to the bankers' convention at Hamburg.550  
These data, the accuracy and completeness of which will hardly be doubted, relate to nine credit banks, nearly all of them with very small capital, and two other institutions, the Hannoverscher Hypothekenverein and the Spar-und Vorschussbank, in Dresden, which either at the opening of bankruptcy proceedings or before were cooperative societies. The total losses sustained by depositors by reason of all these failures during the fourteen years between 1894 and 1907 are calculated at about 24,000,000 marks. It is rather difficult to ascertain the proportion which these losses bore to the total deposits of the German credit banks. 

 It would not be correct to compare the total losses with the amounts due to the depositors on December 31 of each of these fourteen years, since the amount for each successive year includes those for the preceding years. Even if only the amount for December 31, 1906 (2,700,000,000 marks), were taken the total would be altogether too small.  
For what we are concerned with are the total amounts deposited during each year, and these naturally will be much larger in view of the withdrawals, which are especially heavy during the last months of the year. This maximum amount of 2,700,000,000 marks represents, therefore, a total far below the actual amounts deposited. 
On the other hand, the total loss of 24,000,000 marks, as estimated by Salomonsohn is probably far too high, since according to his explanation the claims of the depositors were figured from the last bank statements preceding the failures. 
 In many cases, however, the opening of bankruptcy proceedings is preceded by a run, during which part of the deposits is repaid. It is plain, therefore, that the amount of deposits -- of which only part represents savings deposits - is estimated too low, while the losses are estimated too high.  But even if we accept both figures without change and divide the total loss of 24,000,000 marks by the total deposits of 2,700,000,000 marks it will be seen that the average loss on all bank deposits in the German Empire during the fourteen years from 1894 to 1907 was about nine-tenths of 1 per cent; in other words, of every 100 marks deposited during the fourteen years, from 1894 to 1907, not quite 90 pfennigs was lost.  
This period includes the crisis years of 1901 and 1906, during which the German banks and banking system, on the whole, proved their utmost soundness despite all difficulties and dangers. 
 It is true that subsequently, in 1907 and 1908, new important cases occurred, when banking institutions which were receiving deposits failed and the depositors suffered losses. According to my own inquiries these cases include 29 private banking establishments, 11 registered cooperative credit societies with limited liability, 1 industrial bank, 1 savings and credit bank, 2 loan and credit societies, 1 people's bank, not registered as a limited credit society, and only 2 credit banks, viz, the Solinger Bank in Solingen and the Bonner Bank fur Handel und Gewerbe in Bonn.551

After the foregoing discussion it would seem rather unreasonable to maintain that deposits are being used for syndicate participations or speculative operations or that "grave losses"  have been caused to German depositors by our banks and banking system, and to demand in the same breath the introduction of special deposit banks or special safeguards, the more so, as failures have by no means been rare even among the special deposit banks in England. It is not surprising that the constant reiteration of such statements, hurtful to German credit abroad, in the long run finds a loud echo in foreign countries, which are only too anxious for such news, and that even the London Economist could treat his readers in a recent issue to the news that the German banks were "investing their deposits in mortgages." 552


II. CRITICISM OF THE INDIVIDUAL REFORM PROPOSALS. 

 I. THE CREATION OF A CENTRAL PRIVATE DEPOSIT BANK OR OF A GOVERNMENT DEPOSIT BANK FOR THE GERMAN EMPIRE AND OF SIMILAR DEPOSIT BANKS FOR EACH OF THE GERMAN STATES. 


In order to bring German banking into conformity with the English model, Caesar Straus proposes the creation of a private central deposit bank and Otto Warschauer the establishment of a government deposit bank for the German Empire alongside of a series of deposit banks for the individual States. 

 In view of the above discussion and the German and English experience in this field, the change does not seem justified in the interests of greater security for the depositors. Furthermore, the proposed changes are either impracticable or dangerous. Straus's idea of a central (einheitliche) deposit bank is impracticable, even if only for the reason that neither the German great banks, nor the other banks or bankers, are likely to join in the foundation of such a central bank, since, being more conservative in their business views, they believe that, contrary to Warschauer's calculations, such a bank for the present and a considerable time to come is not likely to prove profitable.  

The idea is impossible of realization, also, because the Reichsbank, for obvious reasons, will never agree to transact the business of the deposit bank in those places, where the former only, but not the latter, may have branches of its own. If I am rightly informed the proposal met with scant favor at the time, just in the last- mentioned quarter. 

For various reasons the Warschauer proposal of an imperial special government deposit bank, either singly or in conjunction with like banks for the individual States, is likely, at least for the time being, to share the same fate.553   
In the first place our authorities would hardly disregard the reasoning that it would not do to substitute bodily a foreign credit system, which owes its development to special local conditions, for a domestic system, which is no less the result of peculiar conditions at home. 

 It will also be recognized that our banks have had a considerable share in the brilliant economic development during the last decades, and that, therefore, any attempt to paralyze their activity is likely to inflict grave injury on our national industry. There will be the more hesitation about making the change when it is borne in mind that the coming decades will undoubtedly bring a very severe struggle for our national industry against foreign competition, in which the unimpaired assistance of our banks will be needed more than ever before. 

 Nor is it likely that there will be much sympathy with any plan that is likely to diminish the "highly appreciated" and always welcome ability of our banks to contribute their share of taxation. In the case of the Reichsbank, which has had to pass through a severe struggle with the competing note banks, there would be the additional danger that the newly established state deposit banks might interfere with and thwart its discount policy. That such a danger exists, is shown by conditions in England,554 where the Bank of England's own bill business has been declining for some years past, and where the bank, owing largely to competition with large deposit banks, is compelled to discount bills at the prevailing market rate, which in most cases comes nowhere near the official discount rate.

 It may also be shown that the Bank of England no longer controls the market for loans on collateral, as the large deposit banks find it possible to supply the market with vast amounts for such loans and are thus in a position to oppose successfully any increase of the discount rate which the Bank of England might deem expedient. 
Thus it has come to pass that of all the functions devolving upon it, and of which no one can he eliminated without injury to the community, the Bank of England exercises successfully only one, viz, the regulation of the currency.  

This also proves the error of the writers who holds 555 that "no conflict of interests between the Reichsbank and a private central deposit bank need be feared," that, on the contrary, "they have common interests," and that both institutions, with the Reichsbank as "the leading institution," would "cooperate in maintaining and sup- porting the proper monetary circulation" of the country.  
The establishment of state deposit banks would, moreover, involve a radical change for the worse, and not for the better. of the entire German banking system. It is not likely that the German credit banks will resort to any measures of self-protection during the early stages, believing, no doubt, that for some time at least, their deposit business will not be seriously endangered by the fresh competition. 
Should, however, the founding of government deposit banks, or even a more energetic quest after deposits on the part of the Seehandlung and other state institutions, come to be regarded as a serious danger to their own deposit business, the credit banks would, as a matter of course and of self-protection, have to enter the competitive struggle with all the means at their disposal. In such a case they would proceed to transform, as far as practicable, their present deposit departments into separate deposit banks or to found new ones, and in either case take over or keep the control,556 management, and shares of the new deposit banks.  

We should then have an imperial deposit bank, deposit banks for the individual States, and a large number of competing private deposit banks, all of which, including the state and private banks, would be compelled to cover the country with a network of branches. Sooner or later all these institutions, possibly in conjunction with the then surviving state note banks, would be found seriously hampering, if not entirely blocking, the discount policy of the Reichsbank. 557  This, contrary to Ad. Weber (op. cit., p. 262), we regard by no means as a "cura posterior."  

Such a picture of the future is by no means exaggerated, if we are to judge by English experience. Warschauer's proposal is based upon the erroneous view that our banking system is inferior to the English system and must give place to the latter. In order to refute his views, it may suffice to state that for a long time the English have been energetically demanding a reform of their own banking, while pronouncing our system superior to their own, until their usual keenness of perception became blunted by the agitation which had sprung up in our own midst. 
 As late as July, 1906, the following expressions were used in an article on "The future of international banking," which appeared in the Bankers' Magazine (No. 748, p. 51): 
 "In Germany we find a banking policy which, though in minor points borrowed from other countries, differs essentially from all others in giving full expression to the national genius. It is as scientific and thoroughly coordinated as English banking is unscientific and haphazard. German banking does not stand aloof from industry and commerce, as ours does. The three are all closely associated. They have a common understanding and a strong sentiment of solidarity."  

This is a foreign opinion.558 In Germany the mere fact that a hen is laying golden eggs suffices to call forth in many quarters the desire to have it killed. 

 In view of the above considerations and the negative attitude assumed by the imperial chancellor at the opening of the deliberations of the bank inquiry commission toward the proposals to change by law our existing mixed banking system, it would seem unnecessary to repeat again the arguments propounded in the second German edition of this work (pp. 155-160), that the profits of the new central deposit bank, at least during the early period, would most likely be very moderate and not, as Warschauer believes, 21-22 per cent ( !), or at least 12 per cent. 559 

2. THE GRANTING OF PRIORITY RIGHTS TO DEPOSITORS

It was shown above that our past experience does not justify the demand that priority rights be granted to depositors. Such a demand, even if better founded, could hardly be conceded, as such a preferment of depositors to other creditors of the bank, who may have entrusted their cash to the bank in current account or otherwise, would be a death blow to the credit of the banks. 
 It may be also argued against it that the very conception of deposits is not fixed either in theory or in practice and still less defined in law with regard to their manifold and constantly varying relations to credits on current account, contango, etc. 560 

 3. THE FIXING OF A LEGAL RATIO BETWEEN SAVINGS DEPOSITS AND THE SHARE CAPITAL.  

The objection to a fixed ratio between share capital and deposits "in so far as they are savings deposits" is directed mainly against Warschauer, 561 who advocates a scheme similar to that legally prescribed for our mortgage banks. 
 This scheme would be unacceptable even if the words "in so far as they are savings deposits" were omitted.  
As a matter of fact, while it might have been desirable to fix such a ratio in the case of the mortgage banks, which are engaged in what may be called the standard business oi issuing mortgage bonds, such or other regulations would be ill adapted to the credit banks with their innumerable and constantly varying business relations. 

Warschauer's proposal is based on the premise that the share capital (he wrongly disregards entirely the surplus funds) ought to bear a certain ratio to the deposits, whereas it was demonstrated above that the foremost protection of the creditors, including depositors, are the liquid assets 562 and not the capital (and surplus), and that in Germany large share capitals are required mainly in view of the diversity of business transacted by our banks. This view is shared in England, to which our opponents are in the habit of turning for their authority. 

4. LEGAL REGULATIONS REGARDING THE INVESTMENT OF DEPOSITS. 

 Proposals were made by certain experts who appeared before the bank inquiry commission of 1908, to the effect that those modes of investment of deposits which were found correct and had been carried out at that time by most of the great banks should be made the basis for legal regulation, as it was intolerable that the "administration of the national wealth" 563 should be entrusted to 10 or 12 persons without any legal safeguards. This remark occurs frequently in banking literature and in other connections.  

Accordingly a legal regulation is demanded requiring that a certain proportion of the deposits is to be invested in German government bonds, the price of which would thus incidentally be raised. As an alternative it is proposed that about one-third or 35 per cent of the deposits in savings banks, cooperative societies, and credit banks be required by law to be invested as follows: Twenty per cent in bills of exchange in accordance with the Reichsbank regulations, i. e., provided with three signatures and running for a term not exceeding three months, and 15 per cent either in other bills, in accounts at " giro " banks, and in loans on collateral not exceeding a term of three months on securities quoted at a German bourse (excepting the bank's own shares or those of a "concern"  bank, or such securities as have been put on the market by the institution in question within three years preceding), or in German state loans or German imperial government bonds, or finally, in first mortgages.  
 Against this it may be urged that even if the above demand were complied with, the depositors, having no exclusive lien on these securities, would run the same risk as they do now in the case of bankruptcy or crisis, the only difference being that believing themselves guaranteed by law against all losses they would have all the more reason to complain. 

 Unlike the mortgage banks and insurance companies, whose business moves along beaten paths, the German credit banks engage in an immense variety of complicated enterprises. Hence no regulations of the kind above described could be applied to them without injury to the special activity of each bank and of the credit business in general. It seems impossible to imagine how any set of regulations, suitable for all times, places, and conditions, could be devised to determine the manner in which the working capital is to be invested. At any rate, the attempt to do so would be a very risky undertaking. Moreover, it is more than doubtful whether any manner of investment could be legally prescribed that would under all circumstances guarantee the liquidity of the investments. 

5. DEPOSITING A CERTAIN PORTION OF THE PRIVATE DEPOSITS AT THE REICHSBANK.

 Heiligenstadt's proposal 564 that the credit banks should be required to deposit one to two per cent of the average annual amount of all their credit items in cash at the Reichsbank represents a totally different and broader standpoint. The proportion was raised to 5 per cent by some experts of the bank inquiry commission, who in all other points adopted bodily the proposal and its argument.  

Starting with the alleged fact that on an average only 50 per cent (between 1895 and 1905 only 37 per cent) of the annual national economic working capital ("volkswirtschaftliches Betriebskapital") placed in the hands of the banks between 1886 and 1895 was used for working purposes in the shape of cash, bills, and loans on collateral (p. 83 loc. cit.), Heiligenstadt concludes that the balance (i. e., during the latter period 63 per cent) of the money belonging to the creditors or depositors was used for purposes of investment; in other words, that an excessive part of the nation's working capital was converted into investment capital through long-term credit or otherwise.  

The above proposal was therefore considered justified, inasmuch as the increase of the capital of the Reichsbank (the regulator of the money circulation and of the credit business) would be the best means to keep an adequate portion of German working capital permanently liquid for working purposes (p. 87) and to take the power of deciding the mode of employment of capital, at least to a certain degree, out of private hands (p. 85).  
Thus the proposal is said to be intended, first and foremost, to strengthen the working capital of the Reichsbank (p. 98, under X), and at the same time to prevent the banks from tying up an excessive proportion of their resources and thus endangering the security for their liabilities (p. 95).  
The supporters of this proposal described the sum to be deposited in cash at the Reichsbank as "the national working reserve," or " iron reserve " (" eiserne Reserve ") which would enable the Reichsbank to issue three times the amount in bank notes, the security for which could not be withdrawn, and by which the nation could be constantly supplied with liquid working funds.  

When subjected to analysis, both the premises on which these views are based and the aims, as well as the conclusions arrived at, prove untenable.  

As regards the premises, the facts set forth on previous pages of the present work suffice to disprove the assertion that German credit banks are in the habit of tying up an excessive part of their resources (p. 83), and thereby endanger the security of their liabilities. On the contrary, we saw that all the liabilities of the German credit banks are covered almost up to two-thirds of their amount by liquid resources, whereas the law requires that even bank notes payable on sight may be covered by cash reserves only up to one-third of their amount. 
  Heiligenstadt's method of calculating the coefficient of liquidity (p. 83) is altogether too unfavorable. I can not see on what ground cash, bills, and even loans on collateral, are by him considered only partly as liquid means, contango and securities being omitted entirely. 565  

As regards the purpose aimed at by the proposal, it is not clear how the Reichsbank (in the event of its note- issuing power being increased by the2 per cent or 5 per cent of fresh cash funds to be furnished by the banks) will be able to keep these funds in any more liquid form than that in which they are furnished by the banks; for the banks would have to withdraw these very cash funds from their most liquid resources, namely, cash balances, bills, loans on collateral, etc. The same cash funds would thereupon be invested by the Reichsbank in practically the same form, namely, in bill discounts and loans on collateral, for which it would issue its notes. 

Most probably, however, no fresh cash would flow into the Reichsbank at all in this manner. The banks would deduct from their "giro" account (which almost always exceeds the contemplated "iron reserve") and place to the credit of the Reichsbank whatever amount they might be required to deposit, just as they would probably do in case of a direct increase of the Reichbank capital in which they were to participate.  

Nor can it be maintained that even in this case the Reichsbank, by reason of the sums placed to its credit, would become possessed of a permanent security for a threefold issue of bank notes. A permanent deposit, or "iron reserve," is out of the question for the reason that the sums which, it is supposed, can not be withdrawn from the Reichsbank directly can be withdrawn indirectly in the form of larger loans, through bills, discounts, or loans on collateral, or through deductions from the giro balances exceeding the minimum deposit. 

 During a crisis - and Heiligenstadt's proposal is essen- tially intended for times of crisis, since for times of prosperity no reform proposals are needed - very many deposits will be withdrawn from the banks, and they will themselves be forced to withdraw from the Reichsbank at least a part of their 2 to 5 per cent reserve.  

But even if this were not the case, the Reichsbank in time of crisis, in order to prevent a run or bankruptcy, would have no other means than to put in circulation all or part of the "national working reserve," whereas in times when money is plentiful this reserve would prove a useless ballast. 

This brings us to a question which is by no means unimportant, namely, whether the 2 to 5 per cent reserve at the Reichsbank should bear interest or not. 

 If it is to yield interest, then all the grave reasons become valid that may be urged against the acceptance by a central note bank of interest-bearing deposits, and which have caused the most prominent of these hanks, upon repeated deliberation, to refrain from accepting interest-bearing deposits. This attitude is mainly dictated by the consideration that, if the central note bank does not wish to bear the loss involved in the payment of such interest-and it is hard to see why it should bear such loss with indifference-it would be compelled to seek lucrative business in the form of discounting and loans on collateral, and possibly just at a time when it ought to employ all the resources at its command to combat an excessive demand for credit throughout the country, especially by raising the discount rate.  

On the other hand, if the 2 to 5 per cent reserve is not to bear interest, that would mean a considerable loss for the credit banks carrying those reserves. They, too, would of course not regard that loss with indifference, but would be compelled to reimburse themselves in one way or another, especially by paying their depositors less interest - a decidedly undesirable result.

 Furthermore - a still more undesirable result in normal times-they would have less funds to place at the disposal of the credit business. An increased demand in the money market being thus met by a diminished supply, the result would be a rise in the rate of interest. Finally - and this would be the most undesirable result of all - the banks, judging by past experience, would probably diminish their noninterest-bearing cash reserves necessary for their liquidity by an amount corresponding to their share in the "national working reserve " carried at the Reichsbank.  

The ultimate result would be that the liquidity of the banks, and with it of the body economic, would be impaired to exactly the same extent that Heiligenstadt intended to improve it. 

 In substance, if not in form, this proposal amounts to the same thing as the proposals which the Reichstag committee, for good reasons, had rejected on the occasion of their deliberations on the stock-company bill of 1884.566 

 These proposals, which aimed at prescribing a special mode of investing the legal reserve funds in cash, or in trust-fund securities, were revived in 1901 in an article in the Gegenwart by Imperial Bank Director Doctor Vosberg. They are, however, liable to serious objections, at any rate so far as the joint-stock banks are concerned; and the same objections, therefore, apply also to the proposals now under discussion.567  

If the banks were compelled to keep their surplus in cash, or to maintain a cash reserve at the Reichsbank, they would have to withdraw this sum from their fully employed working capital (for the suggestion that only surplus capital is to be withdrawn is absurd), to wit, such assets, as the bill holdings, securities, etc.  

Thus they would be compelled either to restrict their business operations, i. e., to call in credit previously granted and refuse to grant new credit, a proceeding which might lead to a crisis, especially in industry; or they would have to attempt to make good this deficiency in working funds by the issue of fresh shares, which course, if successful, would lead to a fresh strengthening of concentrative tendencies and, furthermore, to a fresh withdrawal of ready money from the market to an amount equal to the total value of the share issues. 
 If the attempt to issue fresh shares proved unsuccessful, the calamitous state would continue, namely, the injury to trade and industry, which were to be protected by the proposals in question. In many cases, however, the issue of fresh shares would not be possible, because the deposit of ready money would either lead directly to a curtailment of business transactions, and hence of dividends, or would create the fear of such curtailment, the result in either case being a fall in the market value of the shares.  

If the banks, despite the curtailment of business, endeavored to obtain satisfactory dividends - which is necessarily the aim of the business management of every joint-stock company - they might easily find themselves compelled to resort to hazardous transactions, particularly to force the founding and issue business more than ever. Since, moreover, after the deposit of the guaranty reserve, they would possibly and even probably pay less regard to their liquidity, that liquidity, as well as the quality of their investments, might in the event of a run turn out to have been impaired to a greater extent than ever. If, however, securities were deposited instead of cash, most of the banks, being compelled, in case of a run, to sell the deposited securities, might not be able to do so at all or only at a great loss. If these happened to be trust-fund securities their market value would become unduly depressed during the time of panic. 

Heiligenstadt's proposals would thus deprive the business community of productive capital in two ways- through the deposit of a cash reserve at the Reichsbank and through the issues of shares that might become necessary. Some of the supporters of the proposals have already raised the amount of the proposed reserve from 1 - 2 per cent to 5 per cent; in fact, the amount would he variable at pleasure in an upward direction. I assume that this amount is to be deposited at the Reichsbank, without the creditors having a lien - that is to say, a right of segregation of these deposits (Absonderungsrecht) in case of failure of the credit banks. If this be the case, the Reichsbank, as has been pointed out, would have to part with this cash reserve in the case of a run, which might result in the claims of other creditors than the depositors being satisfied, on the principle of " first come-first served," and the depositors might be turned away empty handed. 

 If this is not to be the case, that is to say, if all creditors are to be given a lien on the cash reserve, or the right of segregation, then the Reichsbank, according to general regulations, would not be permitted to part with this reserve in case of a run, so that the failure which the cash reserve was intended to ward off would in that very case become inevitable. It is also clear from the above that the practical consequences of these proposals would be directly opposed to the efforts, recently made with such commendable zeal, of expanding the check and transfer system, and thus dispensing with the use of ready money in payments and making it available for credit transactions.    

Again, it should be borne in mind that a cash reserve, even of 5 per cent of all credit accounts at the German credit banks, that is to say, about 200,000,000 to 250,000,000 marks, could in nowise influence "the ratio of working capital to invested capital" in German trade and industry to any appreciable extent. Furthermore, while Heiligenstadt's proposal lays special stress on the strengthening of the working resources of the Reichsbank, a bill (since then disposed of) "to change the bank act" (No. 1178 of Reichstag documents) admitted that the Reichsbank's own means had sufficed hitherto for the purposes they were intended to serve, and that consequently there was no need of increasing them. Accordingly provision has been made merely for a gradual increase in the working resources, by a gradual strengthening of the surplus. Lastly, it must not be forgotten that the Reichsbank will, as a matter of fact, be placed in possession of considerable and increasing working resources, through an agreement by which it undertakes the administration of the sums which the postal administration collects through the postal transfer and check systems. 

 The fact that Heiligenstadt began by proposing a reserve of 1 to 2 per cent, that the experts before the bank inquiry commission afterward thought a reserve of 5 per cent appropriate, and that since then one of these experts has felt prompted to raise the proportion to 10 per cent,568 ought to suffice to demonstrate the inept and dangerous nature of all these proposals. For why stop at 10 per cent? Someone is sure to turn up, whether inside or outside the Reichstag, who, with "holy zeal" and with perfectly incontestable logic, will declare even the 10 per cent insufficient, for it is obvious that 50 per cent at the Reichsbank are a far better safeguard than 10 per cent. The banks, to be sure, would in that case fare like the donkey who was just getting accustomed to live without food when he died.  

My attitude toward the proposals here discussed, as well as toward any reform proposals in the banking business, is based on the fundamental principle that all those proposals are to be condemned which, without being of any appreciable benefit to the community as a whole, are injurious to so important and necessary a factor in German national economy as the banks. In the same way I am opposed to those proposals which do more harm than good to the community at large, or which are obscure in their motives and aims, and of whose consequences no estimate can be formed. On the other hand, I should not a priori be opposed to measures the execution of which would impose certain sacrifices on the banks, provided such proposals promise to result in notable benefit to the whole community and thus perhaps in indirect advantages to the banks.  

6 THE PUBLICATION OF SUMMARY BANK STATEMENTS (ROHBILANZEN) ACCORDING TO A LEGALLY PRESCRIBED FORM.

Such a benefit to the general public and to the banks is put forward as an argument for the publicity proposals, especially that of Count Arnim-Muskau.569 Though not worded to that effect, yet the meaning of this proposal, in view of the nature of the German banking business, amounts to this, that all banks and merchants who as a part of their business accept deposits to amounts exceeding on an annual average half (?) of their liable capital shall be under legal obligation to publish summary statements on the first of every quarter. These statements, it is proposed, are to conform to a legal schedule, a draft of which is given, and are to be published at the latest on the first of the following month in newspapers publishing official communications. 

 I do not believe that such statements would fulfill the purpose of adequately enlightening the general public, and especially the depositors, as to the condition of the bank to which they have entrusted or intend to entrust their deposits, no matter what schedule may be adopted. If the schedule goes into minute details, it will as a rule not be read any more than long prospectuses. If it does not go into details, but merely gives "total amounts" for the various items, as is natural, and as is in fact contemplated in the Arnim proposal, it will be read, but will seldom fulfill its purpose of enlightenment, since it will leave the reader in the dark on those very points that are of the greatest importance as regards the soundness of the banks. 

 In particular, if the statement draws a distinction between the secured and unsecured debit accounts, the essential point will be the kind of security given in the individual case, whether a mortgage on improved rural or urban real estate, a factory, or unimproved ground, and whether the mortgage is first or second, whether securities have been deposited, and if so, what is their quality, whether bond has been given, and if so, what is the financial standing of the bondsmen, etc. On all these points the balance sheet will fail to enlighten the reader. 

Neither will it be possible to gather from it the composition of the various items, such as the security and syndicate accounts. In particular, it will be impossible to tell whether the securities, bills, contango, loans on collateral, debits on current account enumerated in the statement are good or bad; and yet the quality of the assets is the main point, the quantity being of secondary importance. Further, acceptances may quite properly have been substituted for book credit, and vice versa. Business discretion, which is an imperative necessity, will of itself forbid the publication of details, but even if such publication were attempted it would simply cause the statement to remain unread. This is precisely what took place with the prospectuses, the publication of which was vehemently demanded some time ago in the interest of public enlightenment. If they are too long they are never read, except long after their publication, for the purpose of constructing a claim for indemnity when the market value of the securities has greatly declined.  

Further "total amounts" fail to indicate the most dangerous cases of credit granting, which have so frequently caused banks to fail 570 in England as well as in Germany - I need only refer to the Leipziger Bank - for instance, the case in which a bank has granted excessive credit to one and the same person, firm, company, or institution, or to one and the same branch of industry.  

The obligation imposed on American note banks never to grant individual credit beyond a certain portion (one- tenth) of their share capital, does not take sufficiently into account the situation and status of each bank. It is, therefore, on the one hand, too schematic, while on the other hand, as experience has shown, it can easily be evaded.

Experience has proved, moreover, that the most disgraceful failures, such as those which took place in England, particularly in time of crisis, occurred among those very deposit banks that had published their statements. The collapse frequently occurred immediately after such publication, perfectly legal in form, without anyone being able to gather from these documents even the slightest hint of the impending crash.  

Space does not permit all the details of the Arnim proposal to be discussed here. I should only like to make the following remarks in reference to the oft- repeated demand for a statement of all assessments due on account of participations. Even the managers of a syndicate are often unable to foretell the amount of these assessments with any degree of certainty. Such is the case with the liquidation of long-term engagements resulting from the taking over of railways or factories or other establishments, with the rehabilitation of distressed or wrecked undertakings, with international business whose management and central offices are located abroad. Again, there are cases in which it is utterly impossible at the time of publication of the statements to foretell the amount to be ultimately invested in an enterprise (perhaps à fonds perdu) or the date of maturity and the amount of subsequent assessments, or - a case of particularly frequent occurrence - the amount of the repurchases (Ruckkaufe) which have to be undertaken so often and to such extent even after the syndicate business proper is ended. Syndicate assessments are like household budgets; those expenses that could not be foreseen at the time the estimate was made are the very ones that crop up most frequently and are surest to disturb the whole forecast. 571  

Finally, summary statements may be misleading, because frequently losses to be written off and other deductions (Rucklagen) can only be ascertained in the course of the business year or at or even after its close, just before the drawing up of the annual balance sheet; and yet the necessity and amount of these items are of essential importance in gauging the bank's position. Again, in a summary bank statement credit and debit items appear without anything to show whether a creditor is at the same time a debtor, and vice versa, and whether compensations must accordingly be allowed for to a large extent.572  

But while I do not believe that the periodical publication of summary statements can contribute much toward the enlightenment of the public regarding the true condition of a bank, yet I will not dispute the beneficial effect of the public criticism that may be elicited by such publications. The comparison of statements of different banks, published simultaneously, would afford a far broader and more reliable basis for such criticism than can be expected of a single statement.  

I also regard these publications as a very excellent means of self-education for the banks. Their mutual criticism, based on the published statements, may gradually lead to uniform or approximately uniform principles of business management, especially regarding the manner and extent of credit granting, and gradually to an understanding concerning some lines, at least, of business policy. This understanding might thereupon develop in all these directions into firm and sound traditions, which hitherto have largely been lacking.

 For theoretical and practical reasons I should also consider it a very desirable and beneficial result if these periodical statements should lead to uniformity in their compilation, and gradually also to uniform annual balance sheets. This would facilitate the comparison of the balance sheets of all the credit banks, a matter which at present is attended with great difficulties.  

Finally, it must not be forgotten that every new device which enables us, unswerved by the current of phenomena, to read, as it were, from a barometer, the present and the near future of economic conditions must naturally restrict the limits of error, which in this matter are necessarily so wide. Summary statements of credit banks, 573 published periodically, would serve that purpose, just as does the publication of the condition of the Reichsbank, or of the fluctuations of the Reichsbank discount (official) rate and of private discount rates, of the demand for labor at the German labor exchanges, as well as the publication regarding the revenue from the stamp tax, from which the amount of bills in circulation at any moment can be ascertained, and of the receipts from railway traffic, from which the existing condition of industry can best be gauged. These publications supplement each other.  

Despite the undeniable and considerable advantages which the periodical publication of summary bank statements thus affords, I am decidedly opposed to the legal enforcement of such publication. My objections are based on what seem to me the following cogent reasons:  

In the first place, I consider it an ill-advised step on the part of the legislator to give rise to the belief (which would naturally gain ground among wide circles of the general public) that from a publication of this kind, which has never yet been adopted in England, depositors could gain a clear idea as to the status, and therefore as to the soundness, of the bank to whose charge they have entrusted or intend to entrust their deposits. This belief would be an erroneous one, no matter what form of publication might be adopted, and it is not becoming or incumbent on the legislator to aid in propagating such errors. Cases like those of the Leipziger Bank and the Marienburger Privatbank would most probably have occurred under the same management, even if those banks had published summary statements. As a matter of fact, they did publish most handsome annual balance sheets, which were, moreover, accompanied by a "business report.''  

My second reason, which to my mind is decisive, is that a compulsory legal regulation of this kind can not be conceived without a legal schedule for drawing up the statement. In fact, a multitude of such schedules have already been suggested by competent and incompetent persons.

 Now, a legal schedule, unalterable for a series of years, is an absurdity, for the business spheres of banks are constantly changing, and accordingly the schedule would of necessity be subject to constant changes, dictated by practical experience. A schedule drawn up by the bank themselves to-day would of necessity be different from One drawn up ten years ago and from one that might be drawn up ten years hence. 

 If ever the impotence of legislation in any field was evident a priori, it is in this field, where the business in question does not proceed in a stereotyped and automatic manner, as is in the main the case with note-issuing banks, insurance companies, and mortgage banks. The latter are, on that account, much more susceptible of government regulation, which our German habit, the result of centuries of drill, still prompts us to regard as the last resort (ultimum refugium) in all cases demanding a remedy. 

 In the third place, practical experience, in Germany especially, has abundantly shown that legislative capacity and skill are as yet imperfectly developed among us, especially in economic matters. Such matters as the publication of bank statements or the deposit of cash reserves for the security of deposits, which to the layman seem self-evident, urgently necessary, and simple in execution - "simple solutions are always seductive to simple minds" -- are in reality exceedingly difficult and complicated. Hence it is to be feared that the advocates of these proposals, starting from the most diverse premises and pursuing the most diverse purposes, would carry them into execution in a form which can not fail to lead to the gravest embarrassments, as experience has repeatedly proved. Above all, there is imminent danger - as illustrated by the very wording of the Arnim resolution - that, aside from credit banks, not only savings banks and mutual credit societies would be compelled to publish statements, but also private bankers, which, to my mind, is utterly inadmissible, for deposits are entrusted to a private banker not so much in consideration of the amount of his private means, but in consideration of his supposed integrity. To compel him to publish a statement of his financial position would injure and paralyze him in the competition within the private banking profession.  
Legislators should under all circumstances guard against ill-advised measures likely to cause injury to and to hasten the suppression of the small bankers and thus repeat the mistakes of the Bourse law.  

Impressed with these considerations, I heartily welcomed the decision of the Berlin great banks to publish voluntarily (beginning with 1909) at the end of February, April, June, August, and October (in December the annual statement is issued) summary statements according to a schedule discussed and agreed on among them which essentially corresponds to the schedule of the " Deutsche Bank." This example has been followed to a great extent by the joint-stock banks, and will doubtless in time become the universal practice. During the early deliberations of this question I pointed out that whatever schedule was chosen, it would be sure to be criticized. However, it is not easy to conceive a schedule which would not be condemned by some critics, no matter whether it was drafted by the banks or by other critics.  

7. PENALTY FOR "BANKS AND BANKERS WHO BY PUBLIC OR WRITTEN APPEALS OR THROUGII AGENTS SOLICIT (anreizen) DEPOSITS OR SAVINGS."  

On the occasion of the passing of the bank-act amend- ment of 1909 the Reichstag petitioned the imperial chancellor for a bill to ward off the danger caused by banks and bankers who by public or written invitation or through agents solicit (anreizen) the public to " invest with them their deposits or savings."  

According to the debate in committee, the bill aims at the suppression of low-class or touting bankers (Winkel-oder Animierbankiers) , or of business men who have no claim to the name "banker," but who, by promises of specially high rates of interest or other advantages, entice the public to hand over to them their savings, while the persons making these promises are neither able, nor in many cases willing, to return the deposits.574  

Certainly these are the only cases in which there exists any danger for the public, and some of these cases may at once be eliminated from the discussion. If a written invitation to open an account is issued by a business man who at the time of invitation is not willing to return the deposit, nor likely to be able to do so at that or some future time, it should be considered as an attempt to defraud.  

Under the law relating to unfair competition, the Central Union of Bankers and Banks at Berlin ("Central- verband des Deutschen Bank- und Bankiergewerbes zu Berlin") established for the protection of banking and bankers' interests, is empowered to proceed against persons who by their occupation are not entitled to call themselves "bankers," with a view to enjoining them from making public use of that designation. I am in a position to state that such action has been taken on several occasions.575 But neither these sham bankers (Nicht-Bankiers) nor savings banks, whose resources, as we have seen, are often far from liquid, are aimed at in the badly worded Reichstag resolution, which only demands that steps be taken against banks and bankers. Besides this the two absolutely different terms "deposits" and "savings" are once more lumped together. Furthermore, the resolution recommends that legal action be taken even when the invitation to invest deposits (?) or savings (meaning, probably "investment of funds in the form of deposits or savings ") (zur Anlage von Depositen) is not made publicly, provided it be in writing.  

But such a written invitation, which certainly is one form of "solicitation," may under certain circumstances become the duty of a bank or banker in a case where through negligence or ignorance a customer whose business they look after leaves money deposited without interest. 

 Moreover, as the word "solicit " (anreizen) used in the resolution is extremely elastic, having received the most diverse interpretation both in theory and in practice, I do not believe that the measure proposed in the Reichstag resolution can lead to any practical results. It is hard to say which is the graver mistake, to enact penal laws whose effect far exceeds the desired and economically correct purpose or such as are rendered nugatory in practice. 

 8. A SUPERVISORY BOARD.  

I am equally unable to approve the idea of a government board of supervisors recently advocated in many quarters, especially by Obst. Such an institution has never yet afforded protection against fraudulent manipulations, while on the other hand it is very apt to lull the public into a feeling of security which such a board, from its very nature, is not able to provide. Even though possessed of the most thorough expert knowledge, such a body would not be in position to obtain a sufficiently correct estimate of the quality of the assets of a bank, to say nothing of the fact that no bank can be expected to allow its competitor who might be called upon to act as expert adviser to the board to gain an insight into its business. 576

 The experience of all countries and at all times in regard to the natural inadequacy of state supervision (see note 23 on p. 789, also pp. 54 and 601) should serve as a warning against any repetition of such experiments.  

Herewith ends the discussion of the reform proposals hitherto made. In obedience to the prevailing tendency in Germany and to the current of the times, nearly all these proposals aim at some intervention by the State or by legislation, which, as far as deposit banks are concerned, has always been most decisively condemned in England, the very country which is assumed to be the pattern for Germany to follow in this matter. Although I am by no means an adherent of the defunct Manchester theory, I must confess that in this important, complicated, and difficult question I share the opinion expressed fifty years ago by a prominent authority in this very matter, an opinion which unfortunately has not lost its actuality and correctness: "The unfortunate system of tutelage has never yet stood the test of practice. It merely leads from step to step, and when it has once been adopted, there is nothing in which the State does not think itself called upon to interfere in the interest of its citizens and for which the latter do not look hopefully and imploringly to the State, while they themselves limit their activity to complaints."  

The man who wrote these words in 1857 was no other than Adolph Wagner.577 I frankly admit that I find this confession written during his younger years more convincing than his latter views and proposals, which, I regret to say, are quite different.  

No State measures will avail against a criminal or negligent treatment of deposits, especially no legal regulations nor any supervisory board, such as Wagner proposed some years ago while under the immediate impression of the crisis of 1901, that is to say, at a time least suitable for judicial and matured proposals.578 

 I feel convinced that the German banking community did not in any way deserve such a manifest vote of censure - for a vote of censure it was; there is no use in blinking the fact. The one thing that is essential above all in this matter is the honesty, trustworthiness, and efficiency of the bank managers. In the United States 579 the Comptroller of the Currency, who may order an investigation of the national banks by special examiners, declared in his official report for 1895 (p. 57 et seq.) that as a rule the examiners detect mistakes, defects, and crimes only after the failure has occurred, and that no supervision by outsiders can serve as a substitute for the honesty and competency of bank managers.580



Notes:

  506. This chapter is a summary of the views which I advocated as a member of the bank bill commission of 1908 and at the examination of experts.  

506a. See Otto Warschauer, "Das Depositenbankwesen in Deutschland, mit besonderer Beriicksichtigung der Spareinlagen" (Conrads " Jahrb. " Third series, Vol. XXVII, p. 433-487). 

507. Caesar Straus, " Unser Depositengeldersystem und seine Gefahren," (Frankfort-on-the-Main, Carl Jiigel, 1892). 

508. Loc. cit., p. 17. 

509. Loc. cit., p. 26. 

510. Loc. cit., pp. 38-39. 

511. Otto Warschauer, "Das Depositenbankwesen in Deutschland," in Conrads' Jahrbiicher," third series, Vol. 2 7 (1904), p. 473 et seq., 477, 481. 

512. Loc. cit., pp. 480-481. 

513. Loc. cit., p. 482. 

514. Otto Warschauer, pp. 483-484. 

515. With unlimited liability. According to Warschauer, credit corpora- tions with limited liability should be forbidden to accept deposits (loc. cit., p. 484). 

516. See resolution of Count von Arnim in the Bourse act commission of Mar. 10, 1896, the text of which has been reproduced by Ad. Weber loc. cit , p. 259-60 and by others. According to that resolution, regulations are to be issued by which banks and business people engaged solely in the deposit business are to be prohibited from engaging in contango, speculative, founding and issuing business (except trust-fund issues) as well as from participating in such business and in any issues not expressly permitted. They are moreover to be compelled to publish monthly summary statements, the form of which - set forth in the resolution - is to be legally prescribed. 

517 See, among others, Otto Warschauer, loc. cit., p. 486 (Bili No. 3). 

518. C. Heiligenstadt, " Der Deutsche Geldmarkt," in Schmoller's Jahrb. Vol. 31, No. 4, P. 98. 

519. Loc. cit., p. 98, X. 

520. Loc. cit., p. 99. 

521. Reprinted in "Handel und Gewerbe," Mar. 24, 1906,12th year, No. 24, p. 4 70, and elsewhere. 

522. Edgar Jaffé, in Transactions of the Third General Congress of German Bankers (Allgemeiner Deutscher Bankiertag), p. 99. 

523. In such cases the bank usually assists only the stock brokers, not the joint stock banks themselves. 

524. Ed. Jaffé, "Das Englische Bankwesen," p. 204, note I. 

525. Ed. Jaffé, in Transactions of the Third General Congress of German Bankers (Allgemeiner Deutscher Bankiertag), p. 99. 

526. Caesar Straus, loc. cit., p. 31. 

527. Loc. cit., p. 99. 

528. According to J. W. Gilbart, "The History, Principles and Practice of Banking," ed. 1901, London, I, p. 310, 311, et seq.; 11, p. 342, 361, et seq.

529. See second (German) edition of this book, pp. 12-14 (foot-note). Thus for instance during the crisis of 1857 the first banks to fail were the Borough Bank of Liverpool with liabilities of £1,200,000, the Western Bank of Scotland, which only a year before had paid a 9 per cent dividend and which had 101 branch offices. The last-named bank had advanced £1,603,000 to four firms which became insolvent, although its total capital only amounted to £1,500,000; furthermore, an item of £260,000 figured in its published balance sheets as good assets, which the managers themselves (according to notes discovered) had marked as irrecoverable. The Derwent Iron Co. alone owed the bank no less than £750,000 and had deposited as "security" (in addition to a land mortgage) £250,000 of its own debentures, which were nothing more than notes of the directors forming the company. None of these facts, of course, could be ascertained from the published statements. In 1858 occurred, among others, the failure of the Northumberland and Durham District Bank of Newcastle with £1,256,000 deposits just after it declared a 7 per cent dividend at the semiannual meeting of its shareholders; the directors pleading that, since so many of the shareholders lived on their dividends, they had not the heart "to face the shareholders without paying a dividend!" 
In 1864 no less than 27 joint stock banks failed, and another large number followed in 1866, including the Joint Stock Discount Co., the Barneds Bank of Liverpool with liabilities amounting to £3,5000,000, the Bank of London, the Consolidated Bank, the Agrar and Mattermans Bank, the English Joint Stock Bank, the Imperial Mercantile Credit Co., the European Bank, etc., etc. 
In the crisis of 1878 the City of Glasgow Bank was the first of the deposit banks to fail; it had lent £4,000,000 to 4 firms, and had published false balance sheets in 1877.  
A series of other banks followed. Compare 0. Glauert, "Depositenbildung in England u. in Deutschland" (Conrad's Jahrb. 3rd series, Vol. VII, p. 808): "From 1814 to 1816,  240 agricultural banks suspended payment, and 70 within the first six weeks of 1826." See also Edgar Jaffé, loc. cit., PP 196-197. 
According to Karl Mamroth, "Die schottischen Banken," (Conrad's Jahrb., 3rd series, Vol. XXIV, No. I, p. 43, note 139) 11 banks of issue failed in Scotland between 1804 and 1842. 

530. Edgar Jaff6, "Das englische Bankwesen," pp. 204-205, and p. 202 


531. Loc. cit., pp. 204, 205. 

532. In England this "doctoring" of the balance sheets is called "window dressing." Edgar Jaffé, loc. cit., p. 205. 

533. Edgar Jaffé in Transactions of the Third General Congress of German Bankers (Allgemeiner Deutscher Bankiertag), p. 96. Ad. Weber, loc. cit., p. 231. The reserve funds alone of all the 82 English deposit banks amounted to about £31,000,000=68 per cent of the paid-up capital, but only about 4 1/2 % per cent of their liabilities.

534. The published balance sheets of the 13,912 cooperative societies connected with the Prussian Central Cooperative Society (Preussische Central Genossenschaftskasse) showed that at the end of 1905 their own resources amounted to 54,625,382 marks, the deposits to 758,514,000 marks. The proportion consequently was 93:7, i. e., the deposits were about thirteen times as much as their own means. For 1,002 cooperative societies with limited liability the proportion of deposits to own resources at that period, was 88:5. 

535. Ed. Wagon, "Die finanzielle Entwicklung der deutschen Aktien-gesellschaften," (Jena, Gustav Fischer, 1903), p. 146; see p. 470. 

536. See Edgar Jaffé, p. 198. 

537. See Ad. Wagner, "Beitrage zur Lehre von den Banken," Leipzig, 1857, pp. 166-170, and p. 61. 

538. On the other hand, however, it must be remembered that if in time of crisis a demand is made on a bank for immediate payment of money which according to existing agreement is only due within a short time, it can not afford to refuse except in case of necessity, and even then for the most part not without risk. A different opinion, at least apparently, is expressed in Der Deutsche Oekonomist of Nov. 11, 1905; 23d year, No. 1194, p. 566). 

539. Lansburgh, loc. cit., pp. 36-38, refers to other sources of error, namely, that both the capital and cash accounts, and the other balance sheet items are considerably influenced by the reciprocal relations of the banks, so that frequently the same amounts are necessarily counted twice, even three times. Consequently, the immediately available assets are frequently lower than they appear in the balance sheet, for instance, when according to the example given (p. 36) a provincial bank passes on its ready cash to a central bank. In this case the amount passed on figures in the balance sheet of the provincial bank as a bank credit, and in the balance sheet of the central bank as cash, and in case the central bank, as is often done, books its giro account at the Reichsbank as cash, the sum in question will figure for the third time as the central bank's cash balance at the Reichsbank. This inconvenience may in part be done away with by placing in the balance sheet of the Central Bank the amount passed on to it by the provincial bank not only among the cash holdings, that is to say among the assets, but also among the debit items, that is to say, among the liabilities. 

540. As long ago as Sept. 5, 1907, in my report at the Third General Congress of German Bankers at Hamburg (Transactions p. 22; and reprint published by Leonh. Simion Nachfolger, Berlin, 1907, p. p), I especially emphasised the fact that a permanent falling off in the liquidity of bank balances would constitute "one of the most serious drawbacks" of the concentration in the banking business. 

541. The degree of liquidity of individual credit banks may of course be more or less favorable than the average for all banks, even decidedly so.

542. In regard to the liquidity of the Austrian joint stock banks, Dr. Eugen Lopuszanski, secretary to the Ministry, Vienna, in a treatise entitled: 'Einige Streiflichter auf das Oesterreichische Bankwesen," in the Volkwirtschaftliche Wochenschrift, von H. Dorn, vol. L. No. 1305, Dec. 31, 1908, p. 442, writes as follows: " The liquidity, in as far as it is exhibited by the ratio of the so-called liquid assets (cash, discounts, loans on collateral, and contango) to the total of creditors, deposits and acceptances, amounted at the end of 1883 to about 65 per cent, and at the end of 1907 to about 45 per cent." 
This comparison shows a considerable decrease in the liquidity of the Austrian joint stock banks. But even the present percentage of 45 per cent is comparatively favorable. 

543. I wish to emphasize once more that, in reference to the liquidity of the assets, the greatest difference may exist among different banks, without being noticeable in any balance sheet or summary statement. 

544. Conrads Jahrb. III series. Vol. 34, No. 5, Nov. 1907, p. 588; cf. loc. cit., Vol. XX, pp. 86-97. 

545. See his article in Conrads Jahrb. III series, Vol. XX, p. 90, in which he calculates that on Dec 31, 1899, in 11 Berlin Banks the immediately available assets constituted only 57 per cent of the liabilities. However, he includes neither the loans on collateral, which for those banks amounted to about 463,000,000 marks on the date mentioned, nor the securities which in 1898 amounted for the same banks to 714,500,000 marks, but solely cash, specie, bank credits, bills and contango. This is not consistent, for the same objections that may be made against the immediate availability of the loans on collateral (which by the way at that time included also the Bourse contango) can be made against the contango, (which was regarded by Heinemann as immediately realisable), nay even against the bills, which likewise cannot always be realised at a moment's notice. 

546. See Robert Franz, "Die Deutschen Banken im Jahre 1908," p. 549. 

547. Some banks, it is true, hold no doubt large amounts of bills due to industrial long-time investments. 

548. See Rob Franz, Die Deutschen Banken im Jahre 1908 (Reprint from the Deutscher Oekonomist, Berlin, 1908), p. 549. 

549. Loc. cit., p 468-470. 

550. Transactions, p. 118. 

551. The compilation given in the "Tag" of Apr. 17, 1908, entitled " Die hauptsachlichsten Bank- und Bankierinsolvenzen 1906-1907," is utterly unreliable. Even the title is misleading, inasmuch as the table deals only with a single credit bank, the Marienburger Privatbank, a joint stock company with limited liability, with losses to depositors amounting to 6,600,000 marks, as already noted in the above-mentioned table by Dr. Salomonsohn. The firm of Messrs. Haller, Sohle & Co., despite its title "Hamburger Bank," was no Bank, but merely a private banking establishment. On the other hand, while the list purports to be essentially a statement of losses of deposits, it quite unwarrantably includes brokers' firms, as well as a whole series of banking establishments which either had no deposits, or whose depositors sustained no losses. One firm had simply gone into liquidation because it was taken over by a bank (without even a shadow of danger to depositors); another firm, alleged to have lost 672,000 marks, could not be traced even with the assistance of the chambers of commerce. 

552. See Deutscher Oekonomist, Jan. 18, 1908, 26th year, No. 1308. 

553. At the beginning of the Bank Inquiry of 1908, the Imperial chancellor expressly stated through Herr Wermuth, the Under Secretary of State, that no division between pure deposit banks and banks transacting miscellaneous business was contemplated. 

554. See Edgar Jaffé, "Das Englische Bankwesen," pp. 170-178. 555. Caesar Straus, loc. cit., pp. 38-39; Otto Warschauer, loc. cit., p. 474. 

556. This effectually disposes of the assertion by the former bank official Lansburgh (loc. cit., p. 55) to the effect that the German bank managers are opposed to deposit banks solely on the ground that they are not likely to yield to them (the managers) sufficient profit. This direct attack on the probity of all German bank managers does not become any more excusable by the fact that Lansburgh (ibid.) starts with the idea "that a deposit bank is far more profitable than a bank dealing in securities," an idea which, in view of the present absolutely and relatively small German national wealth, is utterly erroneous. This is not and never was the attitude of the managers of German credit banks. They are ready to establish deposit banks immediately they become convinced of the propriety of such a step, or as soon as legal enactments or the measures taken by State institutions or deposit banks shall force them to do so. 

557. See 0. Glauert, loc. cit., p. 815; Reichsbank President Koch in Bank-Archiv, 4th year, No. 5, March, 1905. The statement that the tasks of the Reichsbank have of late been rendered more difficult by the "concentration of the credit banks influencing the open market" would apply in a still greater degree to the proposed Reichsdepositenbank, and to any private, or non-Federal state banks, except that the effect of the latter would be not merely to hamper but even to thwart the discount policy of the Reichsbank. 

558. See Edgar Jaffé "Das Englische Bankwesen," pp. 170-178. See also an essay entitled "La haute Banque allemande," in "La chronique industrielle, maritime et coloniale," Jan. 6, 1905, p. 3: "Thanks to the support and aid lent to it by high finance, German industry has in a short time undergone a gigantic development. There can be no doubt that without this alliance, without this union of its industrial and financial forces, the Empire would not have achieved the wonders which we have witnessed." 
See also Ad. Weber, loc. cit., p. 257, citing various opinions including those of Anatole Leroy-Beaulieu and of an English expert, who speaks of German banks as follows: "They are virtually the pioneers of the home and foreign trade of the German Empire" (see Frederick J. Fuller and H. D. Rowan, "Foreign competition in its relation to banking" in the Journal of the Institute of Bankers, Vol. XXI, Part 11, p. 55). Even André E. Sayous, who as a rule has little to say in favor of the management of the German banks, and who in his book, Les Banques de Dépòt, les Banques de Crédit et les Sociétés financières (Paris, 1901, L. Larose), pp. 292, 293, goes so far as to assert that a serious panic, even one of no great severity, "would force nearly all the German banks to suspend payment," nevertheless concludes the 3d chapter of that book with the words: "Be this as it may, while the French banks have accentuated the economic stagnation of our country, the German banks have had a considerable share in the brilliant industrial and commercial expansion of Germany." 

559. I pointed out there, among other things, that, so far as human foresight goes, there was no reason to expect that the Reichsdepositen-bank would receive deposits to the extent of at least 1,000,000,000 marks, the amount on which Warschauer bases his calculation of the chances of profit - unless the funds collected by the postal cheque offices were assigned to it. Even assuming this, the business expenses must be deducted from the gross profits, which at first could hardly exceed 1 per cent. As the expenses of the German credit banks absorb 31 per cent of their gross profits (see Rob. Franz, "Die Deutschen Banken in 1907,'' p. 78), and in the case of Berlin banks even 33 per cent, the net profits would scarcely amount to more than one-fourth to one-half of 1 per cent on the interest-bearing deposits, and the dividends would amount to abont 5 to 6 per cent, according to the amount of the share capital. Even this would only be reached gradually. Further, I pointed out that the analogy with the English deposit banks, whose dividends had led Warschauer to make his estimate, did not hold. In the first place, in England the paid-up share capital, on which dividends are to be paid is, in contrast to the reserves, absolutely and relatively trifling in amount (in 1904 for 87 deposit banks an average of 15,000,000 marks per bank), while the turnover and deposits are extremely large, 6,250,000,000 marks (see p. 202). More- over, deposits accepted in London with or without the condition of two weeks' notice bear interest only at 1 1/2 per cent below bank discount, and this applies to only such deposits that have been at the bank's disposal for at least one month, the minimum amount of deposit at any time being £10. I have misgivings concerning the use to be made of "first-class" industrial securities and bank shares for loans on collateral up to 30 per cent of their market value, a device admitted by Warschauer manifestly to increase the lucrativeness of the proposed institution. At his demand I will explain that these misgivings are based on the fact that dividend- paying securities are subject to great fluctuations in quotation and, in critical times, can either not be sold at all or only at a great sacrifice, while on those very occasions the margin is with difficulty kept up and the repayment of advances can not be readily expected. Further, the practice which Warschauer is disposed to admit would lead to the very evil for which the English deposit banks are blamed, namely, the use of deposits for Bourse speculation. Finally, as regards the "acquisition of first mortgages" by deposit banks pure and simple, which Warschauer even deems "advisable" (geboten), I do not regard it as a desirable investment, at least to a considerable extent, since these banks have to be ready at any time to repay call deposits or short-term deposits, and it may be difficult to realize even on first mortgages. - -  

560. Nor can the advocates of this idea appeal to the fact that according to Roman law the creditors of noninterest-bearing deposits possessed a prior right in the case of bankruptcy of a banker (argentarius), which Papinian expressly states was introduced for the benefit of the whole community (Utilitate publica receptum - see 1. 17, secs. 2, 3, 8 D, 16, 3), for modern business methods allow of no comparison with those of the argentarius. 

561. Among the arguments raised against it, see Deutscher Oekonomist, 22d year, No. 1127, p. 432 (July, 1904), "Suggestions have been made relating to the proportion between deposits and share capital. This, however, is pure word-play without any value; for on the one hand the reserves are property of the bank, just as apt to be called upon to cover liabilities as the share capital, and on the other hand the assets are security for all liabilities, and not merely for the deposits. To establish a definite proportion between share capital and deposits would have a purpose only in case there were no other liabilities than the deposits. That is the condition of the Savings Banks, which of course is totally different from that of ordinary banks." 

562. See Deutscher Oekonomist, July 13, 1904 (22d year, No. 1127), p. 432.

563. This remark, though often repeated, is a gross exaggeration, to say the least, intended, or at least apt, to scare the timid. The national wealth certainly does not consist merely of deposits, bills and current account balances, which for all those banks that had at least 1,000,000 marks capital each amounted at the end of 1908 to about 7,250,000,000 marks. Of these banks only the largest are managed by 10 to 12 managers, just as State and private industrial and agricultural concerns. On the contrary the national wealth, estimated at present to be between 216,000,000,000 to 360,000,000,000 marks, consists of a great number of enormous items, such as the savings deposited in savings banks and cooperative societies to the amount of about 14,000,000,000 marks, of the vast amounts, totaling about 40,000,000,000 marks, invested in mortgages and mortgage bonds, etc. Nevertheless, I do not underrate the great power and responsibility of the heads of our great banks, as this book will show. 

564. In Schmoller's Jahrbuch, vol 31, No. 4, " Der Deutsche Geldmarkt," pp. 72-95. 

565. Heiligenstadt very properly omits debits on current account from the list of immediately available assets. In giving his reasons for this omission, he makes, however, the surprising statement (p. 82) that "With a view to aiding the enlargement of commercial and industrial enterprises and enabling them to complete their works, the banks grant credit to these enterprises, in the form of current account credit, quite regularly, and to an increasing degree as the money market becomes less favorable (!). This is done in the hope and with the purpose of restoring the liquidity of such loans by the issue of shares and debentures, when the money market becomes more favorable." It is hard to imagine how the banks could have pursued such a business policy. What really occurred occasionally was that certain credits which were, originally working credits were, through the debtor's inability to pay, gradually transformed into investment credit (Anlage-Kredit) very much against the will of the creditors; or, that credit which was really intended to be used for investment was applied for as working credit (Betriebskredit), or finally, that during good times (or such as were considered good) the long-term credit, that is to say, investment credit, necessary for finishing works already begun, or for extending existing works, so as to make them profitable even in critical times, was granted in the hope and expectation that the debtor would soon he able to get clear of it in the form of debentures, or shares. Lansburgh probably goes too far when he says that the credit granted to industrial companies is "distinguished" from all other credit in that it can be cast off at almost any period desired ("Die Verwaltung des Volkverrnogens durch die Banken," [separate reprint] pp. 9-10). During many years of practical experience in banking I have not met with a case where a bank or bank director in his sound senses granted credit regularly during bad times and even "to an increasing degree as the market becomes more unfavorable," with the idea of restoring its liquidity by issuing shares and debentures at a more favorable season, and I do not believe that such banks or bank directors could remain in business very long. It may not be amiss to point out that credit banks have, on the other hand, been frequently reproached with the opposite policy of having constrained manufacturers to adopt the generally unsuitable and far too expensive short-term personal credit with quick and frequent renewals, although in the case of improvements, rebuilding, and the erection of new works, long term credit, irredeemable for many years, or at least credit repayable in instalments, is more suitable. 

566. See: Commission report, p. 26 "* * * that it would be outright unbusinesslike, especially in the case of industrial companies, to oblige them to withdraw money for the reserve funds from their business and invest it independently, whereas they may perhaps be compelled to burrow the necessary capital at a higher rate of interest. * * *" 

567. See "Deutscher Oekonomist," Dec. 28, 1901, (Vol. XIX, No. 993). 

568. George Bernhard in "Plutus," 4pr. 24, 1909, p. 306. 

569. Reprinted among others by Ad. Weber, loc. cit., pp. 259, 260. 


570. See Felix Hecht, "Die Katastrophe der Leipziger Bank," (Storungen im Deutschen Wirtschaftsleben wahrend der Jahre 1900 ff, published by the Verein fur Socialpolitik, Vol. 6, Geldmarkt, Kreditbanken, p. 373, et seq.): "At the end of 1900 the Leipziger Bank, according to its balance sheet, held bills amounting to 37,798,570.67 marks. But this balance sheet does not show that about 12,000,000 marks of these bills were pledged to the "lottery loan fund" (p. 384). 

571. As an additional argument against the demand for a statement of the "total of moneys employed for contango transactions and loans on collateral," the following may be urged: Nothing is gained, least of all the object aimed at, by showing the extent to which the bank has favored speculation, as the contango and loans on collateral may comprise quite different engagements and advances on goods. Neither can the kind, number and above all the quality of the securities deposited at the bank as guarantees be ascertained from the statement demanded, although these are the most essential points; and matters would not be greatly altered if the "total amount" - nothing else is possible - of the guarantees were also published. 

572. Doctor Salomonsohn in Transactions of the III General Congress of German Bankers, p. 116. 

573. In regard to this see the very appropriate remark by Eugen Lopuszanski in his treatise "Einige Streiflichter auf das Oesterreichische Bankwesen (In the "Volksw. Wochenschrift" of Alex. Dorn, Vienna, Dec. 31, 1908, Vol. LX, No. 1305, p. 433): "While banking, outwardly, forms only a limited part of the national economy, yet by reason of its organic arrangement and purpose it is best fitted, through its condition at any given moment, to exhibit the interaction of the forces and the results of the movement of the national economy, in a cross section, as it were, of the economic organism." 

574. See the essay: "Spargelder" in the "Neue Politische Correspondenz" of May 21, 1909. 

575. Such a case is mentioned by the "Neue Politische Correspondenz" of May 21, 1909. 

576. See "Aelteste der Berliner Kaufmannschaft" in the Berl. Borsen- Zeitung, No. 264, June 9, 1909; Alfred Loewenberg in the "Tag," No. 198, Aug. 25, 1909, and especially Koch in the "Zeitschrift fur Handelswissenschaft und Handelspraxis," Vol. 11, p. 38 et seq , who justly points out, that the proposal to increase the personnel seems rather strange at a time when everbody is studying how to reduce the number of employees. 

577. In his book "Beitrage zur Lehre von den Banken," Leipzig, 1857 p. 159. 

578. Ad. Wagner, "Bankbruche u. Bankkontrollen," in the Deutsche Monatsschrift fur das gesamte Leben der Gegenwart (ibid. Lohmeyer) Year I, No. I (Oct., 1901), pp. 74-85, and No. 2 (Nov., 1901), pp. 248-258, especially p. 255. See on the other hand the Deutscher Oekonomist of Oct. 19, 1901, and Nov. I, 1902, and R. Rosendorff, "Bankbruche u. Bank- Kontrollen," in Hirths "Annalen des Deutschen Reichs," 1902, No. 3 pp 182-197.

579.  Paul Marcuse, loc. cit., p. 136.  

580. The fact, noted by Obst, that, according to the report of the Comptroller of the Currency of Sept. 23, 1908, the majority of the presidents of the national banks have declared themselves satisfied with the supervision hitherto exercised by the "national bank examiners," does not necessarily mean that this method has served its purpose; it may mean something totally different.