Regional President Speech

R E I C H S B A N K O P E R A T I O N S 1876 - 1914 Karl R. Bopp President, Federal Reserve Bank of Philadelphia 1 9 5 3 (1964 - Minor Revisions) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ELMER WOOD Teacher: colleague: friend Motto da QAViht von dzinm IJaieAn k<ut, EAW-i/ih &6, urn £6 zu bo^itzm. Goethe ? FauSt What you have inherited from your forabe. Earn it, so it may become part of you. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Page X purposes and Functions of the Reichsbank......................1 II Reichsbank Procedures and the Availability of Credit. 7 A. Discount Procedures.................................. ........9 Characteristics customers......................... 1. of 10 2. Characteristics of bills.............................11 B. Discounting at Preferential Rates................ ........17 C. Lending against Collateral (Lombarding). . . . . 18 D. Availability of Credit............................ ........21 III. Rate Policy and the Cost of Credit.............................29 A. Aftermath of Monetary Reform .............................31 B. Easy Money and Preferential Rates................ ........36 C. Prolonged Prosperity.......................................^Ll'P 1. Seasonal variations ..................................^ 2. Other facets of policy....................... ........53 (a) Crisis operations .............................53 (b) Open Market operations................ ........53 (c) Devisen policy.......................... (d) Issuance of small notes......................56 (e) Increasing minimum clearing balances. 57 D. Crises and Reappraisal of Policy................ ........59 E. Impressions of Major Influences on Rate Policy . 68(a) IV. Basic Problems of Control 71 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Page X Customers of the Reichsbank, November 15, 1910. . . . 11 XI Local and Consignment Bills at the Reichsbank . . . . 12 XI. Size of Domestic Bills Falling Due July 1- September 3°, 1907.......................................13 IV. Preferential Discounting at the Reichsbank: 1880-1896 19 V. Discounts and Loans at the Reichsbank before and after the Change of Policy in June 1911...............52 VI. Selected Accounts at the Reichsbank in 1910.............73 CHARTS I. Reichsbank and Open Market Discount Rates, 1880-1898. 17(a) II. Reichsbank Rate and Related Factors A. 1876 - 1885 .....................................30(a) B. 1886 - 1895 .....................................30(b) c. 1896 _ 1905.....................................30(c) D. 1906 _ 1914.....................................30(d) STATISTICAL APPENDIX Reichsbank Rate and Related Factors 81-90 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PREFACE This study owes its genesis to a request that I contribute an essay memorial volume in honor of my first teacher in economics, Harry Gunnison f the University of Missouri. I hoped to produce something interesting Brown o j- -n the allotted time by analyzing the early history of the Reichsbank because I had written a number of unpublished fragments and had collected many bits of information on the subject over a period of more than twenty years. I started with two simple ideas. The first idea was that — for reasons developed by Keynes in his Treatise on Money — a central bank must have firm control over the volume of reserves of commercial banks if it is to pursue an effective monetary policy. The second idea was that the Reichsbank was one of the powerful central banks in the golden age of central banking before the First World War. This idea, though widely held, was not shared by Keynes. As I worked over my materials, I found myself forced -- for the reasons summarized on pages 72 to 7^ — to conclude that: (l) before the First World War the Reichsbank paid virtually no attention to reserve balances and ordinarily did not know what their magnitude was; (2) it did not try to establish their amount at predetermined levels; (3) it was not in position to do so quite apart from any question of controlling its assets because of the roagnitude and variations in its other accounts; and (4) German banks did not roaintain either their reserve deposits or their total primary reserves at any stomary relationship to deposits. These judgments tempted me to conclude the Reichsbank had been a weak institution. This conclusion, however, consistent with other bits of information. For example, the overriding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ■p thp Reichsbank was to maintain convertibility; and it had achieved objective of tn . not without effort! — throughout the period. this objective - At this point, I was farther from a memorial article than I had when I began. I could envision no conclusion consistent with thought l wab •aiq at hand. And, of course, I now had many more unanswered questions. the materia.Lt> 4-v, circumstances I interrupted the study to rewrite an unpublished essay Under tnese the Bank of France for Professor Brown. As soon as this enviable obligation discharged, I was compelled — for reasons that Harry Brown preeminently s would appreciate_to return and wrestle with the unfinished business of the Reichsbank. My attention was attracted by that tempting though slithery concept: availability of credit. Many of the difficulties that troubled me would have been resolved if the Reichsbank had changed appropriately the administration of the rules under which it granted credit. Search for an answer to this question was both frustrating and rewarding. The frustration came because, although the Reichsbank published annual reports, they are virtually barren of policy state­ ments before 1914. The reward came from an unexpected source. One day, while reflecting about possible.sources of information, I remembered that the Reichsbank was required under certain circumstances to pay a tax on some of its notes. It was possible that this source of revenue would be discussed when the Reich budget was before parliament. It was this tenuous line of reasoning that led me to the Stenographic Reports of the Reichstag. They proved unexpectedly fruitful on this and other operations. I have presented in Chapter 2 the evidence that led me to conclude that the Reichsbank did not control the money market by changing system- ically the eligibility or acceptability of paper on which it extended credit. At this point I returned to Elmer Wood’s profound and discerning study Erifrl T'Vi ------of Central Banking Control. He demonstrated that a central Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ^ may be in position to pursue an effective policy even though it is not able to establish a given asset (such as the volume of its discounts) or a given liability (such as reserve balances or notes) at some predetermined level. Once I grasped the real implications of this idea, my materials fell into place. Ky indebtedness to Professor Wood has been mounting for more than three decades. I have taken the liberty of dedicating this study to him as a token payment on a debt that can never be liquidated. A translation of the original manuscript was published in the tfeltwirtschaftliche^_Archiv in 195^ under the title "Die TStigkeit der Reichsbank von 18?6 bis 1914.” One of the abiding satisfactions I derive from studying central banking is the continued warmhearted generosity with which outstanding men in the field — theorists and practitioners alike — have discussed and criticized my work. I cannot express adequately my appreciation of their contributions to my intellectual development over the years but neither can I fail to list those who strengthened this particular essay through oral discussion and written criticism of preliminary drafts. They are: James W. Angell Miroslav A. Kriz Robert V. Roosa Benjamin Haggott Beckhart Arthur W. Marget Jan Smit Arthur I. Bloomfield Abbot L. Mills, Jr. Allan Sproul Harry Gunnison Brown Lloyd W. Mints Woodlief Thomas Howard S. Ellis Hans Neisser Jacob Yiner J. Herbert Furth Melchior Palyi Charls E. Walker L. Albert Hahn J. Frank Rehfuss John H. Williams Charles M. Hardin Sir Dennis H. Robertson Elmer Wood Arthur B. Hersey Harold V. Roelse Ralph A. Young Henry K. Heuser Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis REICHSBANK OPERATIONS; 1876-1914 Karl R. Bopp President, Federal Reserve Bank of Philadelphia j Purposes and Functions of the Reichsbank Politically, the Germany established by Bismarck was torn by conflict between the forces of centralization and federalism. In the Bank Act of 1875, the centralizers were able to establish the Reichsbank and endow it with responsibility for regulating the monetary circulation of the whole Empire; but the federalists were able to continue the authority of other banks to issue notes. The original draft related generally to banks of issue and con­ tained no provision for a Reichsbank. At its first meeting the Reichstag commission of inquiry deferred discussion until it received a parliamen­ tary directive as to whether such a bank should be established. The original draft appears in Stenographische Berichte iiber die Verhandlungen des Deutschen Reichstages (hereafter cited as S.B. The exact title and the method of numbering the volumes were not maintained throughout the the period.), 1874-1875* Vol. Ill, pp. 648-652. The vote to defer dis­ cussion appears at Vol. IV, p. 1,147. Ludwig Bamberger, secretary and an influential member of the commission, is reputed to have said: MI will accept no law without a Reichsbank; and I will accept any law with a Reichsbank.” See Karl Helfferich's introduction to Bamberger's selected speeches and articles, published under the title: Geld-und Bankwesen, Berlin, 1900, p. 70. I shall follow the suggestion of C. F. Dunbar, Chapters on the Theory and History of Banking, New York, 1891, p. 190, by translating "Privatnotenbanken” as independent banks of issue. The complications resulting from the continuation of such banks created certain difficulties, but the centralizers won the substance of the argument though they may appear to have lost the form. Economically, the new Empire was primarily an agricultural country the verge of incredibly rapid strides toward industrial and commercial °pment. The period from 1876 to 1914 may usefully be divided into two 01'V'Q 1 Q -P 0 roughly equal length. Until the middle nineties, despite the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis g term price decline in the western world, the German economy made slow interrupted by long depressions. After the middle of the nineties, progresb, rid prices began a recovery, and the German economy expanded at unprece­ dented rates, interrupted by occasional crises. Students of Reichsbank policy will find it desirable — for reasons that will become apparent in Section III_to devote particular attention to the first few and the last few years of the entire period. The Reichsbank was ambitious to be the great bank of the Empire and to contribute to the great expansion. It began with reserves far in excess of minimum requirements and competed actively Hto employ its funds.” With the rapid development in the second half of the period, the Reichsbank found it increasingly difficult to maintain adequate reserves without having the German economy become too heavily indebted abroad at short term. Foreign funds became less dependable as political tensions mounted. ^ H. Neisser, MDer Internationale Geldmarkt vor und nach dem Krlege," in Weltwirtschaftliches Archiv, Vol. 29, 1929, pp* 183-194. The Reichsbank began operations on January 1, 1876, as successor to the Bank of Prussia which had been established on January 1, 1847, to replace the Royal Bank founded by Frederick II in 1765* The head of the Bank of Prussia had been directed by statute (§87) to maintain discount and interest rates as stable as possible. The Bank did not reduce its rate below ^ per cent. Until the 1850’s it was limited by the usury laws and did not go beyond 5 per cent and rationed credit periodically. Although it did not cease ationing with repeal of the usury laws, it did rely more on the rate, increas­ es it, for example, to 9 per cent for two months in 1866. The Reichsbank, ^ iring the personnel and experience of the Bank of Prussia, began as a *ull..fledged central bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis It was authorized to engage in various transactions of which the following were most important: 1. To buy and sell gold and silver; 2. To discount, buy, and sell bills having a maximum maturity of three months and signed by at least two - usually three - names of known solvency; 3. To buy and sell debt obligations of the Reich, German states, and domestic cooperative corporations; and to discount as well as buy and sell such obligations with a maximum maturity of three months; 4. To extend loans for not over three months on speci­ fied collateral; 5. To collect maturing obligations and to transfer funds; 6. To accept deposits, including interest bearing deposits; 7. To issue notes - these were made legal tender on January 1, 1910. The Reichsbank was directed "to regulate the monetary circula­ tion of the whole Empire, to facilitate clearings, and to see to it that (1) available capital is productively employed.M Enmeshed in its monetary XT)--------------------------------------- Section 12 of the Bank Act of March l4, 1875• The third duty reads: fur die Nutzbarmachung verfugbaren Kapitals zu sorgen." This was trans­ lated for the National Monetary Commission (hereafter cited as N<,M*Co) as to utilize available capital. " (N»M»C., German Banking Lavs, p. 39• ) •Evidently the translator was not an economist. policies were operations as fiscal agent for the Reich, various state governments, and other public bodies, as a nationwide center of payments, clearings, and collector of maturing bills, and as a large bank of dis­ count and deposit for private customers: Understanding of Reichsbank policy is facilitated by keeping mind that the three statutory tasks did not necessarily indicate a Qnnn°n Program of action. In some respects, indeed, the obligation to e m°netary circulation had a contractive bias, whereas the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis j.- o + n assure productive employment of available capital had an • ^ -h-iflq The management was not unaware of the practical evidence expansive • conflict, especially because of the wide seasonal variations in of tne currency demand discussed in Section III-C. The dominant objective in case of conflict was to regulate the irculation so that the Reichsbank could always redeem its notes in gold. To assure that this objective would be achieved, the law placed limitations on the issuance of notes, The Reichsbank was required to maintain full cover in cash and eligible bills against its outstanding notes. Of this cover it was required to keep at least one-third in cash. Cash for this purpose was defined as current German money (gold, silver, nickel, and copper coins), Treasury notes, and gold in bars or foreign coins valued at Ml,392 per German pound fine.^ In addition, the Reichsbank was required to pay a tax at the The German pound is equal to one-half kilogram. The mint law provided that 139| ten-mark pieces be coined from one pound of fine gold; there was a seigniorage or brassage charge of 3 marks per pound. rate of 5 per cent per year on its outstanding notes in excess of cash reserves plus a quantum specified In the law. For purposes of determining the taxable issue the definition of cash reserves was expanded — logically to include the (2) notes of other banks of issue. Generally speaking, of course, the greater I27------- ------------------ Both the volume of reserves and the reserve ratio could be influenced rectly by legislation and Reichsbank operations, quite apart from the k^rect effects of monetary policy. For example, originally the Reichs- was not authorized to issue notes of less than M100. The 'Treasury ICL2oaU^ 0^ Ze<^ issue sniall notes (M5, M20, and M50) in amounts up to flrst^i^^011* -^-906 the Reichsbank was authorized for the ized t ^ ^ssue no‘t©s of M20 and M50 - and the Treasury was author- jjj circulSSU6 no^0s By substituting its notes for Treasury notes ratio *tion' ®an3£ could increase both its reserve and its reserve the Bank t n° C^ange ^-n 'total monetary circulation* This change enabled I907 ,, 0 Eleet the quarterly drain of cash in September and December volunjg below the one-third minimum ratio. See memorial The Inipi^ 0 ^ei^ s^aRk : 1901-1925 (hereafter cited as R.B. Ill),, p. 23• were nn+ f 10ns such changesdesigned to meet practical problems } X always fmiy understood. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis rve the more certain was maintenance of convertibility, the resex Maintenance of excessive reserves, however, would not assure that available capital was productively employed. No objective criteria were to test achievement of this objective. One might interpret the established Xaw as implying that the amount of such capital was a magnitude independent of Reichsbank policy itself. The management, believing the real bills doctrine, felt that it could and should invest heavily in self-liquidating paper and that it should not maintain reserves in excess of its judgment as to the amount needed to assure convertibility. At any rate this conclusion seems to reconcile partially the apparently contradictory claims of the management that it should not accumulate "idle11 funds and also that it (1) should not strive to maximize profits. The concept idle funds was vague S.B., 1880, Vol. I, p. 135; 1881, Vol. I, p. 121; and 1889-1890, Vol. I, p. 203. and was not related to idle real resources in the economy. The Reichsbank vigorously pursued the objective of facilitating clearings, especially during the presidency of Dr. Richard Koch, a tech­ nical specialist. It actively fostered the growth and use of clearing (giro) and deposit accounts. Primarily this was viewed as a matter of efficiency. Debits per mark of deposit were clearly greater than payments per mark of currency. Hence a given volume of cash might be considered more efficient as reserve against deposits than against notes. Occa­ sionally one gets the impression that a more efficient clearing machanism Was v^ewed also as a means of reconciling the other objectives, especially since the law required no minimum cash reserves against deposits. But is view was not held consistently. The management recognized that P°sits were sight liabilities that could be called and that their very Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis fficiency might make them even more vulnerable than notes. It is difficult to describe the role of profits in the policy f the Reichsbank. As we shall see, the Management recognized it had public responsibilities that could not be discharged if it sought to maximize its profits. It deliberately engaged in operations that reduced profits when it believed the public interest would be served, as when it paid premium prices for gold, granted loans free of interest on the importation of gold, or held its discount rate below 5 per cent when it became subject to a 5 per cent tax on additional note issues. Nevertheless, the management was not indifferent to profits, primarily because it did not fully compre­ hend its role as central bank. Specifically, it did not feel that it could be expected to hold an "unreasonably” large proportion of its assets in the form of non-earning reserves. Desire for earnings appears to have been an important factor not only in the introduction of preferential rates in the 1880's but also in the seasonal reductions in the rate during the prolonged prosperity of the last quarter century. The management argued that "In the general interest of stimulating national economic activity, the central bank must constantly take into con­ sideration maintenance of as low and stable a discount rate as conditions permit."^ ^ In retrospect it would appear not merely a coincidence that a program to achieve this objective would also be in the immediate profit interest of the Reichsbank. (1) - ------------------------ Dubl • u* Von Umm> "Diskontpolitik," p. 135* In 1912, director von Lumm Y1 1^hed a series of four articles under this title in Bank Archiv, serI ’_PP* 129-136, 145-150, 162-167, and 179-187; hereafter this ]_^p0S °ited as "Diskontpolitik." The series was reprinted in lQm 1926. See also speech of President Havenstein, S.B., 1*07-1909, p. 4,209. — ' Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 22 pptchsbank Procedures and the Availability of Credit The Reichsbank blanketed Germany with a head office in Berlin gjid a network of branches that increased from 182 bequeathed to it by the Prussian State Bank in 1876 to U87 in 191^. Since the head office (1) bought less than 20 per cent of the volume of bills, it is necessary Memorial volume, Die Reichsbank: 1876 bis 1910 (hereafter cited as r B. II)> PP• 13^-135• The discount earnings and therefore average holdings at the head office were relatively far less: 6 - 8 per cent (pp. ll+O-lJ+l) except in the early years, indicating that it bought shorter bills. (See lo^low, notel, p.12.) The proportion of bills bought at the head office was even smaller when the preferential rate described in II-B was in effect. to consider the relationships between the head office and the branches The head office kept itself informed of business conditions through reports from the branches: semi-annually from the independent 'branches in larger cities and annually from the subordinate branches in towns and villages. The President held annual conferences with local branch directors in various cities to discuss business and credit developments and prospective changes in organization and procedures. The head of­ fice audited and examined all branches. It also established larger lines of credit for individual customers;, acting on recommendations of the branch officials and directors. Apparently the equity of the cus- (2) tomer was a primary consideration in establishing the line. Once 12)--------- — — ----- R B M^moria-1- v°lume, Die Reichsbank: 1876-1900 (hereafter cited as P* 83. Inference drawn from discussion of cooperative C etl-es• See also NoMoCo, Renewal of Reichsbank Charter, pp. 207-208. he line was established, the branch apparently had almost complete edom so long as it did not exceed the maximum. Thus, although the adjective "independent" had a legal origin - Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis fficials of such branches could obligate the Reichsbank - it had a vider meaning; such branches had, considerable latitude in their opera­ tions o In fact, the managers of such branches received a percentage of the profits of their branches. The management said that, "The pur­ pose of this arrangement is, on the one hand, to stimulate as much as possible the activity of the branch by means of providing a direct interest to the manager in the financial success, and, on the other hand to give assurance that only good and safe business will be (l) done. °H Th® arrangement, it should be noted, was not directed \l) R„Bo I, p» 36° Payment of the share of profits was deferred until the manager left the bank and all of his transactions which might re­ sult in losses had matured, toward operating efficiency - though that might have been an incidental by-product; it was directed toward securing as much profitable business as possible. Since the prices - discount and loan rates - were deter­ mined at the head office, the initiative of the branch managers could show itself only in increasing volume. This objective, of course, would conflict with a monetary policy of contraction. On balance, it (2) seems to me that the profit motive prevailed when such conflicts arose=, The judgment is consistent with the general tone of Reichsbank publications. A fragment of supporting evidence may be found in N„MoC., Renewal of Reichsbank Charter, pp. 66 and 206. This volume contains translations of a series of articles from the Frankfurter Zeitung and of articles by Dr. Richard Koch, former President of the Reichsbank, The newspaper said that as a result of this arrangement some branches resorted Hto artificial methods of attracting discounts.... and have +3en "t>ried to obtain bills while a rise in the bank rate was imminent, th«+ ren^-ering the bank's own discount policy ineffective;" and also real '*D:ranc^es tended to be lax in applying the principles of the that d.°ctrlne Dr Koch defended the arrangement but admitted „ 0 ^-s Possible that younger managers of the numerous subbranches at Veer>red at times in this respect /promising renewal of discount a mi ^ 27 ^eing misled either by an excess of business zeal or by sconception of the true state of things." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Discount Procedures IX. A' The management of the Reichsbank, in common with that of many other central banks, accepted the "real bills" doctrine and operated primarily in what it at any rate believed to be such bills. From 1876 until 189U, the annual volume of bills drawn or payable in Germany in­ creased with population from about M12 billion to about M15 billion, and the average amount outstanding increased correspondingly from about M3 billion to about M3-3A billion. After the middle nineties, the volume of bills increased much more rapidly than population, reflecting the very rapid economic development of Germany. Roughly one-third of all bills drawn passed through the Reichsbank; but for reasons to be analyzed later, the average portfolio of the Reichsbank varied between 10 and 15 per cent of the average amount of bills outstanding.^^ TTJ — — — The following data are taken from R.B. II, p. l6l, for 1876, 189^, and 1910; and from Enquete-Ausschuss, Die Reichsbank, Berlin, 1929, p. 28, for 1913t Amount of Bills Drawn or Payable in Germany Average Amount of Bills Outstanding Total: Marks Purchased Million Marks $ Held Year Mil. marks per capita by Reichsbank marks per capita by Reichsbank I876 12,37^ 287 33«3 3,169 7^ 12.7 I89U l1*, 7^8 287 32.1 3,777 7b l4A 1910 31,005 U80 35*0 7,838 121 10-9 1913 8,500 12.1 Although the Reichsbank discounted or bought only bills with a maturity not exceeding three months and having at least two - usually signatures of known solvency, the volume of eligible bills out- the Bank was always adequate to permit expansion of its portfolio. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis On the other side, although it never resold bills, its portfolio Since the Reichsbank was authorized to sell bills, this was a tter of administrative policy, not legal compulsion. The policy was Tstified officially on the ground that the Reichsbank "is the strong- t and last source of credit in the land; it pannot, like other banks, claims for credit on a higher institution.” R.B. I, p. 76; com­ are pp* 19 an(i 132* This justification reflected a literal rather than a functional interpretation of the phrase "lender of last resort." <?ee J. Plenge, Von der Diskontpolitik zur Herrschaft uber den Geldmarkt, (hereafter cited, Diskontpolitik), Berlin^ 1913, ppT 195-19^20y-204,' and notes pp. 383-389* W. Conrad, "Von der Diskontpolitik zur Beherrschung des Geldmarktes: eine Erwiderung" in Bank Archiv, Vol. 11, 3^0, cites as reasons for not rediscounting bills that the customers discounted bills with the understanding that they would be held by the. Reichsbank until maturity and that the Reichsbank did not want to give hanks an insight into its business for fear of losing customers to them. was always large enough and its maturity distribution such that — save, possibly, in slack seasons — the Bank could enforce its terms, if necessary through contraction. 1. Characteristics of customers The Reichsbank was authorized to acquire bills with at least two and "as a rule,” §13, three signatures known to be solvent. The third sig­ nature was frequently added by a bank which sold the bill to the Reichsbank shortly before maturity for collection. The Reichsbank, however, was a large commercial bank as well as a bank for bankers. It established lines of credit for each of its thousands of discounting customers. President von Dechend said: "With us, anyone may discount — every solid ordinary person and every solid good firm without respect to his wealth.11 ^ As is shown in Table I, T?)------------------- — 1889-1890, Vol. I, p. 600. He was contrasting the Reichs- a. with^the Bank of France which, he said, admitted only the so- called presentateurs. ke great bulk of the lines of credit were small. Of more than 66,000 1910, less than 1,000 were for more than M|- million. Even of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis q more were open for industrial borrowers than for banks. large TABLE I r Customers of the Reichsbank November 15, 1910 Banks & Merchants Agriculture Total Bankers & Commerce Industry & Related Cooperatives Others 66,681 2,361 2k,128 21,2kk 9,854 1,026 8,068 t0 d is c o u n t 914 148 323 344 10 35 5^ l^lln only glsssified according to ; guc of line of credit 1 000-10,000 marks 24,944 lk-9 9,915 5,531 5,369 142 3,838 11*000-20,000 14,676 205 5,784 4,224 2,317 192 1,95^ 21.000-30,000 7,028 195 2,559 2,1+55 828 142 Sh-9 31.000-60,000 8,752 403 3,091 3,^56 792 225 785 61,000-100,000 4,819 34l 1,^63 2,211 313 155 336 101,000-500,000 5,525 725 1,218 2,942 218 152 270 501,000 and over 937 3^3 98 425 IT 18 36 Source: R.B. II, pp. 154-157- 2. Characteristics of bills The Reichsbank distinguished between local bills, payable in the district covered by the purchasing office (Platzwechsel), and con­ signment bills, payable outside (Versandwechsel). A comparison of TD------------------------ Consideration of foreign bills will be deferred to Section III, the two types is given in Table II. From 1876 through 1910, the Reichsbank bought 33 million local H® for M80 billion, giving an average size of about M2,500. Average ities varied from k2 days in 1910 to 60 days in 1894 and 1896. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis TABLE II Local and Consignment Bills at the Reichsbank L o c a l B i l l s C o n s i g n m e n t B i l l s Purchases Average Average Purchases Average Average No. Value Size Maturity Portfolio No. Value Size Maturity »ortfolio (thous.) (mil. m) (marks) (days) (mil. m) (thous.) (mil jn)f.(marks) (days) (mil. m) Tear 531 1,107 2,085 57 227 2,028 3,016 1,1+86 27 17^ 1816 297 798 1/791 2,243 60 2^8 2,3^0 2,914-0 1,256 30 lj-81 1,558 k, 065 2,609 k2 373 3,680 6,778 1,814-1 19 1910 Source: R.B. During the same period it bought 89 million consignment bills worth 1CL35 billion, giving an average size of about Ml,500. Average maturi­ ties varied from 19 days in 1910 to 31 days in each of the years 1886 to I889 inclusive. m ~ The average size and. maturity varied considerably among the various branches as is illustrated in the following data taken from Yerwaltungsbericht der^.Reichsbank fur das Jahr (hereafter cited as R,B^V>B. fur) 1896: ~ " Variation in average size and average maturity of discounts and loans at Reichsbank offices in 1896 S i z e M a t u r i t y type Min. Max. Berlin Aver. Min. Max. Berlin Aver. *e*lbui8 1,000 6,703 3,673 Z,kk0 21 81*- 21 52 ^•Ignment bills 537 ^,600 2,796 1,^59 12 71 12 28 taribara k 233 28 27 (*) borrowing 2,800 68,670 27,627 15,914-14 rePayment 2,200 72,^60 31,517 16,707 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Local bills increased gradually in importance. In 1891 they half the average portfolio of domestic bills for the first cotiPrl3e Their lowest proportion was 42.5 per cent in 1883 and their time. 64.8 per cent in 1906. highest was For a number of reasons, including a desire to counteract that it was Insensitive to the credit needs of small business, the Reichsbank published data on the size of domestic bills. There (1) no minimum, and the Reichsbank discounted bills as small as M10 was N.M.C., Interviews on Banking in England, France, Germany, Switzerland, and Italy (hereafter cited as Interviews), p. 341. The distribution of bills falling due in the quarter July 1 - September , 30 1907, which illustrates the data published for other periods, is shown in Table III. TABLE III Size of Domestic Bills Falling Due July 1 - Sept. 30j 19Q7 Local Bills Consignment Bills Number Cumulative Number Cumulative (thous.) Per cent per cent (thous.) Per cent per cent £88 than 200 marks 73 17.7 17-7 328 36,1 36.1 200 to 400 74 17.9 35.6 184 20.3 56.4 **01 to 500 6.6 33 8.1 ^3-7 60 63.O 501 to 1,000 84 20.4 64.1 134 14.8 77-8 M 01 to 3,000 86 21.0 85.1 122 13*4 91,2 3>00l to 10,000 42 10.3 95-4 52 5-7 96.9 than 10,000 19 4.6 100.0 28 3-1 100.0 — - 100.0 909 100.0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The maximum maturity of bills that the Reichsbank was author- mirchase was three months. It did not customarily renew bills, ized to pux ^ in the case of farmers. The average maturity from 1876 to except in X910 varied between 28 days (in 1910) to 4l days (in 189^) and usually varied only a day or two from the mode of 35 days. But these ayerages conceal some of the dynamics of discounting at the Reichsbank. Roughly l8 per cent of the portfolio matured within a week, and 28 to 30 per (2) cent within two weeks. Roughly half, or a little less, matured w r These averages were computed from holdings on the 7th day of months from February to December inclusive, and on the 31st of December The proportion of short bills was probably even greater at the end of a month. within a month. In terms of credit operations, customers discounted at the Reichsbank for a variety of reasons. Many bills were handed in for col­ lection, especially by banks. Since the Reichsbank charged discount for a minimum number of days, such bills were discounted when they had that many / O \ days left to run. Another group came from commercial, industrial, and 131------------ — — The exact number of days depended on place of payment, amount of ill, and similar factors. Some of the handbooks for merchants and raders reflected this practice in the sections devoted to the eomputa- bir? °f discounts. They show how to compute discount for, say, a 90-day . ky using the commercial bill rate for 85 days and the Reichsbank » for 5 days. See, for example, L. Rothschilds’ Taschenbuch fur 58th Edition, edited by Christian Eckert, Leipzig, 1920, recall ■^ern^)urg> as a member of a commission of inquiry in 1926, that when he was active before the first World War his bank ■^turit^6^ kill8 ^ days and provincial bills 10 days before E&Quet ^ ^ecause that was the best and most convenient way to collect. va8 U8sctluss, Die Reichsbank, p. 136. His distinction for Berlin as niade fOUrse * identical with that between local and consignment bills y the Reichsbank. See also, W. Conrad, Loc. cite, p. 3^0. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis yal customers who were seeking credit accommodations from "their a£ri-cul Tnnfrer bills came from this source. The difference in purpose be- bank* 1 -i ection and borrowing helps explain why average maturities were tween co-u- for local than consignment bills. Finally, in times of pressure, longer h n the prime market rate touched bank rate, as happened frequently toward the end of the year, banks and possibly other dealers in credit discounted -omewhat longer bills. I cannot cite contemporary evidence, but it is probable that the maturities depended on the composition of their own portfolio.^ ^ gjH VrnRr^Schacht, who had 1)6611 an alternate director at the Dresdner T^nk as early as 1908, did testify - but in 1926 at the age of 49 - that when a banker had to meet large payments "he begins to leaf through his portfolio for 3> 4, 5, 10, 15-day bills, and then says, I must go to 30 days; or, as the saying used to be, we had to go to 50 days at the Reichsbank, that is, we had to take our bills up to 50 days to secure the money." The italics did not appear in the original. Enquete-Ausschuss, Die Reichsbank, pp. 136-137* Ordinarily, however, the Reichsbank did not acquire prime — that is top quality — long bills. Such bills were discounted in the market at less than the official rate. Some writers have placed great emphasis on the mere fact that bank rate was above market rate. They seem to infer that since both were rates at which bills were discounted a dual pricing system was in effect. Actually the rates usually related to articles of different quality. In fact there was more than one market rate; the published rate referred to .'prime bills, other rates were n®gotiated for bills of less than prime quality. Bank rate, however, / p \ W*S ^iformly applicable to all eligible and acceptable bills. Und p^00 J*.F‘ Sckar and H. Reccius,"Die Spannung zwischen Banksatz ivatdiskont", in Bank Archiv, Vol. 11, pp. 65-?0» Most of the bills acquired by the Reichsbank were collected ^ity. Nevertheless, the collection experience of the Reichsbank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis d*cates that it acquired many bills of inferior quality. Between 2 r Cent of all local bills were not paid by the drawee upon and 3 Pe (1) sentation at maturity. In general these were small bills; in pfe R.Bo II, P* 127= The data relate to the years 1895-1910, inclusive. Ather data on which this paragraph is based appear at pp. 126-131, & - 2 W - value, the proportion varied between k/lO and 8/l0 per cent. The pro­ portion for bills of M100 and less was usually 6 per cent or more - 8 per cent in 1895. The record for consignment bills was not as good. Of such bills roughly 5 per cent in number and 1 to 1^- per cent in value nere not paid by the drawee upon presentation. Again, the poorest record vas with the very small bills, as many as 10 per cent of which fell in this category. The chief reason for the difference in experience be­ tween the two categories is that local bills were bought only after ac­ ceptance, whereas the Reichsbank endeavored to secure acceptance of consignment bills after purchase. The losses sustained by the Reichs­ bank were, of course, far less than these proportions. Only MI58 per (2) Million of bills bought between 1876 and 1910 seemed uncollectible. The proportion varied between M2 per million in 1897 to M8l8 per ■illion in 1901. Of this amount, only 1/3 was written off; and perhaps 80 per cent of the amounts written off, in turn, was recovered ultimately. The im­ portant point for our; purposes, however, is not the immediate or ultimate effect on the profits of the Bank- The important point is that the ichsbank year after year acquired many second rate bills. Its ap- ent immediate losses tended to concentrate in years of economic iculty, but this did not deter it much - primarily through its Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - from acquiring more bills of the same quality. Small branch managers - ‘ and that it was almost the only lender in parts of eastern Germany. nr G. von Schulze -Gaevernitz, "Die deutsche Kreditbank" in Grundriss A*r Soziar6konomik Vo 2. Bankwesen, Tubingen, 1915, p. 75. The author points out that earnings of branches of the Reichsbank from local bill) in 1908 were: for Frankfurt a. M., M253;000 with an average maturity Of 15 days; for Glogau, M603,000 with an average maturity of 71 days; for Flensburg, M6l5,000 with an average maturity of 63 days; and for Stralsund, M626,000 with an average maturity of 73 days* See also K. yon Lumm, "Diskontpolitik", p. 146* H. B. Discounting at Preferential Rates From 1880 to 1896 the Reichsbank frequently discounted prime bills at preferential rates, primarily to meet the competition of inde- pendent banks of issue. After a few months of experimentation, uniform rules were established for such discounting. Only prime bills for at least M3,000 and having at least six weeks to run were eligible. Be- 8k*ning in l88l, operations at the preferential rate were suspended *fcsn the official rate reached 5 per cent - reduced, apparently in 1895^ ^ Per cent - or when exchange rates reached the gold export point / ^ 1> PP» 81-82, 148. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis REICHSBANK AND OPEN MARKET DISCOUNT RATES 1880-1896 PER CENT PER CENT 1880 1882 1884 1886 1888 1890 1892 1894 1896 17(a) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Bills were not purchased at the preferential rate at the head ffice in Berlin/'1^ The preferential rate was approximately the going S Be, I889-I89O, Vol. I p. 2.0k; K. von Lumm, "Diskontpolitik", p. r»te on prime bills in centers outside Berlin. The relationships be­ tween the official rate, the preferential rate, and the open market rate on the Berlin Bourse are shown in the chart. From 1880 to 1885 tjie official rate was not reduced below k per cent; but the prefer­ ential rate was frequently reduced to 3 per cent, and in l880-l88l was 2| per cent for short periods. From 1886 to 1896 there was only one year (1890) in which the official rate did not touch 3 per cent, with the preferential rate frequently as low as 2 per cent. The importance of preferential discounting at the Reichsbank Is shown in Table IV. II • C. Lending against Collateral (Lombarding) In addition to buying or discounting bills, the Reichsbank loaned on collateral. The Bank recognized the important functions per- foraed by collateral loans but, believing the real bills doctrine, felt they were far less important than discounts to modern banks of issue "because they cannot be used as collateral against notes» From time to time the Reichsbank established a maximum for lombard portfolio, although it occasionally exceeded the formal The average lombard portfolio varied between 8 and 16 per cent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis TABLE preferential Discounting at the Reichsbank; 1880-1896 Percentage of Average size (marks) Average maturity (days) bills acquired at of domestic bills of domestic bills preferential rate ■0. of At Average No. of jays i-n Changes All bills At preforate All bills pref.rate No, Value Portfolio effect 1,423 35 0 8 19 1.507 n»a. 35 75 n=a 18 170 n 11 231 31 1,5-92 33 77 n 7 17 14 1,681 33 75 7 15 m 1 3I 8 K 5 ) 24 l,66l 34 75 n 11 16 350 29 1,699 36 76 18 38 I 288 20 1,633 37 76 17 35 348 28 1,635 38 76 23 45 s i 3^3 4? 1,663 9,07^ 40 75 28 52 a 323 36 1,588 8,007 39 26 48 m 273 38 1,670 7A99 39 22 42 *90 76 12 1.727 10,673 35 76 5 12 0 1,637 35 m 339 17 1,5^9 10,777 40 22 4-2 J 93 200 37 1,627 11,677 39 77 14 28 & 3^6 16 1.507 11,306 41 78 26 49 267 18 l,6l4 11,368 40 78 18 36 896 61 9 1,739 11,297 37 76 5 11 IftT 0 1.727 35 ®ource: R-B* II, pp. 130-133= n.a. - not available This table illustrates the slithery ground on which one walks in trying to l*terpret times past. Take the year 1887 as an example., A few bills (1 out of 20) discounted at the preferential rate; but they are relatively large (5 or 6 dliuvL I**6 averaSe) and they are longer (almost 2 times the average ) so that bills at the preferential rate comprise over half the average portfolio. Such J?iJiaerations also account for the fact that inauguration and elimination of the ^^®*ential rate had only slight effects on the relation between local and con- hills and on the average size or maturity of bills 0 °f the total earning assets of the banko The securities and commodities eligible as collateral as well as maximum loan values were specified in ^ law. The Reichsbank itself at times imposed more stringent condi- °ns. The value of the collateral had to be maintained at the specified leVels “throughout the loan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The law permitted the Reichsbank to lend on collateral for , no to three months; but, except for a short time beginning in pgrioas uy ^880 when it made some fixed maturity loans at preferential rates, all loans were callable either by the Bank or the borrower. Interest was vable only for the period that the loan was outstanding, except under the special circumstances discussed in Section III-C-1. Although the character of the borrower was not ignored, the basic condition of loans vas the value of the collateral. The Reichsbank stated that "in lorn- bard operations, as with bill purchases, the rate of interest has been the most important means used by the ~Bank to regulate its portfolio. In this way it was always possible for the Bank to extend a loan on every application supported by eligible collateral. It was never obliged in collateral loan operations to introduce more or less capri- „ (1) cious restrictions which impose a hardship on the borrower.*». R.Bo If p. 106; see also R. Koch, in N0M»Co, Renewal of Reichsbank Charter, p0 222. The management approved the legal provision that lombard loans should not be used as collateral for notes. Since such loans were not "self- liquidating,” the management stated the risk of loss was too great. Actually its losses on collateral loans were less than on bills. In part, this was because the collateral loan value of securities and commodities was °nly a fraction of their market value, whereas bills were bought at dis­ counted value 0 The management never integrated its collateral loan ex­ perience -with its theory of note cover. Instead it cited its favorable e3tPerienee as evidence that it operated conservatively in a business Was inherently suspect for a central hank ~ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis D. &valiability of Credit II The discount and loan procedures have been described to form basis for judgment as to availability of credit at the Reichsbank. On balance, I am strongly of the opinion that credit was always avail­ able on specified terms and that the Reichsbank did not modify its rules or Interpretations as a deliberate means of exerting or releasing pressure on the money market. Operating procedures, including rules governing eligibility and acceptability of bills for discounting and (1) of collateral for loans were formalized and generally known. As an illustration, in 1912, C. Letzel brought out the eleventh edition of R. Telshow's, Per gesamte Geschaftsverkehr mit der Reichs­ bank; Ein Handbuch fur das Publikum mit Benutzung amtlichen Materials. A translation of the rules in effect at the time is given in N,M.C., German Imperial Banking Laws, edited by R. Koch, pp. 135-218. Some evidence could be cited on the other side, but it is not convincing. For example, the Bank stated that "it had to acquire from direct observation an adequate and continuous insight into credit de­ mand and credit supply" and that it could do so only by securing a i (2) large portion of the outstanding domestic bills. It might seem -----------------------------------------------------— R-B- I, p. 79 that a purpose of this insight might be to refuse "improper" demands. Actually, however, it appears to have been to distinguish among demands as (^) S a means of determining how to proceed with the rate. " T5) ---— Dp t ^ for — P* 126, where distinctions are drawn between gold demanded over83^101"1" anc^ ^or internal circulation and between demands based on ment Pe^u^a'*:ion and overproduction and those arising from normal pay- the n a,^uS* See also K. von Lumm, "Diskontpolitik," pp. 132-135? and quotations on p. 30, as follows* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis A number of writers of the time mentioned glibly the virtues and necessity of having a central bank observe many bills directly in even the understand real developments in the money market. I must confess order to uriu .. fflnr,p i mull over this approach the more weaknesses I find in it that tne c reliable it would appear to have been. and tne -lc First of all, top management certainly did not observe all the bills. Even had thev been disposed to do so — and we have no evidence that they were so disposed_the mere number and location of the bills would have cooled their ardor. Second, although we have evidence that the head office did not always know what the branches were doing in the way of discounting, I have found no evidence that the management had established an adequate system of classifying and reporting the characteristics of discounts on a continuing basis. Nor was a representative sample constructed; and there would be reason to doubt that the bills discounted at the Reichsbank were a repre­ sentative sample of all bills. Third, even if the management had had an adequate system of continuous reporting, it is not easy to see exactly how it could interpret objectively the summaries and analyses in terms of rate policy. An expansion in all industries would have been reflected in the totals of bills drawn which would, in turn, have been reflected in tax receipts on bills and possibly in total discounts at the Reichsbank. At any rate, it could have been ascertained without ever seeing any bills. Expansion in some industries and contraction in others might indeed have been reflected in detailed analyses. how should such relative changes be interpreted in terms of the rate? Fourth, in the light of these considerations, it appears improbable the management had any systematic procedure for actually observing bills 0n c^anges in broad categories. It seems much more likely that the itself formed an impression on the basis of reports from members of Control committee — some of whose members were well informed on the market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis but none of whom had as much knowledge of bills actually discounted generally Reichsbank as the discounting officials and clerks of the Reichsbank at th and from impressions of its own staff who, probably at one or more itself had actually seen the discounts because they had completed trans- removes, TTn+h customers. In summary, when I try to think what a member of actions gement should do about the rate as a result of what he might learn from th's approach, I conclude that, though he might have become informed on many facts he would find the whole collection of details inadequate to form a rational opinion on the rate. Another bit of tentative evidence that the Reichsbank might have adjusted the administration of the discounting mechanism as a method of control is that the Preussische Bank had rationed credit — for example, in July 1853) (1) January I856, and even as late as 1872. Since von Dechend, who was presi- ^Albrecht Sommer, Die Reichsbank unter Hermann von Dechend (1865- 1890), Berlin, 1931? PP* 128, 13^. dent at the time, continued as the first president of the Reichsbank, it might be supposed that the practice would have been continued. Actually, however, the new rules adopted by the Reichsbank in keeping with the law excluded paper of the kind discriminated against by the Preussische Bank In 1872. With the rapid industrial development and the emphasis of the nanag0merit on profits, managers of branches became rather lax in applying legibility rules. In December 1906 — that is when consideration was being 8n increasing the rate from 6 to 7 per cent -- the managers of the ches were reminded of their obligation to examine the business origin bills tendered for discount. They were directed to be cautious about hich might be supposed to have been drawn to provide permanent working Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (1) - or rnerely to "acquire money.” Renewals were to be limited to a capital 7lY r.b. Ill, p. 25. See also Die Bank, 1908, pp. 619, 923, 1058. The .“Managers did not necessarily treat all customers alike. Those who bfanc t insist on being paid in gold but accepted notes or silver and those ^ discounted regularly at the Reichsbank rather than shop around for lower ^ "''were given preferential treatment. Die Bank, 1909, p. 288. p3t singi extension for agricultural bills only. The warning was repeated in e June 1908, after Havenstein became president, and the branch managers were pmohatically directed to rid their portfolios of ineligible bills. These moves by the Reichsbank were an attempt to make operations at the branches conform to established principles. They did not reflect a change in those principles and did not inaugurate a move in the direction of changing accept­ ability standards from t ime to time depending on economic developments. The primary interest of the Reichsbank in taking these steps was in the quality or character of its portfolio rather than in the total amount. When Ernst Fischer asked what policy the Reichsbank would follow with respect to discounts, President Havenstein requested him "to quiet the doubts of those who are afraid that the Reichsbank intends, as a matter of principle, to restrict its credit business in the next ten years, and to say to them that what the Reichsbank has in view is only a securing of its solvency; that therefore it desires to have only such bills as it may use as legal security for its notes, but that it has no desire to bring about in any way a systematic limitation of the business of dealing in credit.” (2! ---- ----------— Op *M.C., German Bank Inquiry. Vol. I, p. 102^. G. v.Schulze-Gaevernitz, count^ h "The Reichsbank is not indeed required by law to redis- bills,,» business world has confidence that it will never decline good At the German Bankers Convention which met in Munich in September 1912, wabach of Bleichroders cited letters from managers of large industrial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis to the effect that branches of the Reichsbank required them to companies 7TT" r-handlun^en des IV. Allgemeinen Deutschen Bankiertages zu Munchen -^nd 18. September 1912, Berlin, 1912, pp. 87-88. The reasongiven 80 ih t the branch needed reimbursement for its trouble. .In one instance, waS q0 day bills were required; in another instance some ^5-day bills. In s°me ^ “tances the industrial customer had to buy appropriate bills from a s0ine bank. A branch did not feel that a minimum clearing balance was adequate compensation Heifferich of the Deutsche Bank gave a similar report and said some branches reqUired the discount of bills ’’which the customer often does not discount (2) happily and which the President and Board of Directors in Berlin do not wish.” T2T " " Ibid, p. 79; see also pp. 77-78. The quantitative effect of the new discounting policy is impossible to estimate. Helfferich inferred it was a reduction in total discounts. Another contemporary observer estimated the reduction at M150 to M200 million. Die Bank, 1911, p. 529* The official Memorial Volume, published in 1925, was probably in error when it gave the impression that there was no quantitative effect by commenting: "The measure had the desired effect; the place of finance bills was taken for the most part by solid commodity bills.” R.B. Ill, p. 26. Arthur Feiler, editor of the Frankfurter Zeitung, said that managers of many provincial branches attracted discounts artificially. Die Probleme der Bankenquete, Jena. 1908, p. 30. A final consideration is the periodic complaints, especially from agriculture and small business, that the Reichsbank was too restrictive. These complaints, however, were directed against the law and the rules rather than against variations in conditions for granting credit. It should be remembered that the management of the Reichsbank believed the "real bills" doctrine. In lts rePHes to charges of discrimination, it defended its eligibility rules; it did not allege that eligible discounts of other origins were ever turned down. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis It is likely that in periods of expansion, at least some touched the ceilings of their lines of credit at the Reichsbank; customers j n0 evidence of complaint on this score and do not conclude but I iin h t it was a significantly restrictive factor. There were also complaints that the Reichsbank was too us in granting credit, especially at preferential rates. © President von Dechend replied that the law had specifically forbidden the Bank to engage in any business other than discounting and lending on "Now I ask you,” he said, "can one demand of us that we collateral. should not cultivate the single business that we are directed to do, but instead content ourselves with what other people do not wish to have?”^ ^ S.B., 1881, Vol. I, p. 126. Emphasis not in the original. On balance, it seems to me that the Reichsbank did not modify its ambition to be active in discounting by tightening its acceptability rules periodically. Our greatest interest, of course, is in the assumptions on which customers, particularly commercial bankers, operated. Fortu- ^tely, as to this, we have positive evidence. The commercial bankers took it for granted that the Reichsbank would in fact always discount Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •gible PaPer even though they made no secret of the fact that they ised -granting procedures that would create such credit. c r e d i t ^ N.M.C., Interviews, pp. kQ6-k07. for example; Messrs. Mankiewicz and Blinzig of the Deutsche Bank told the National Monetary Commission that "the great strength of our finan­ cial system in Germany is the Reichsbank. Under that system the ques­ tion of our own cash reserve is of secondary importance, as we can at n1i times convert our holdings of commercial paper into cash at the „(2) Reichsbank." Tz) N.M.C., Interviews, pp. 373-375. Similarly, Messrs. Schuster and Nathan of the Dresdner Bank testified "...we are practically indifferent to the percentage (of cash on hand and in the Reichsbank to deposit and acceptance liabilities) as long as we know that we have on hand a sufficient amount of prime bills., o If we should have a debit in the Clearing House of more than our cash in the Reichsbank, we would immediately send over bills with our endorsements, and establish a credit sufficient to pay the amount of our debit." T5T— th Interviews, pp. 395-396. They also said they regarded elr bills discounted" as a practical reserve - "it is immediately convertible into cash at the Reichsbank." Max Schinkel, testifying before the German Bank Inquiry in 1908 > contrasted the discount procedures of the Bank of England with 8e of the Reichsbank, and concluded "if the quality of the bill sfies the Reichsbank, it takes any amount that is sent to it, at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis + ..(D the official r o T T m X 9 German Bank Inquiry, Vol. I, pp. 377-378* This is also the of Arthur Feiler, op* cit., pp. •udgwent 11-12. The contrast between these statements and those of J. W. Gilbart, an English banker, with respect to the Bank of England after the crisis of 1847, is illuminating. Gilbart said; "It will not be safe for practical bankers to calculate with too much confidence upon the suspension of the Act (of l8¥0- They should make their arrange­ ments on the supposition that it will not be suspended.” He also said: "Banks should not only avoid depending on the Bank of England, or on I2) bill brokers; they should also avoid depending on other banks. (2) J. W. Gilbart, A Practical Treatise on Banking, New York, lo51, pp. 76, 79-80. A practicing banker would not operate on the assumption that a source of funds was absolutely reliable if he had known an occasion when it had failed or had been contingent on meeting conditions unspeci­ fied in advance. The confidence of German bankers undoubtedly was based primarily on experience with the Reichsbank. It was reenforced by the Reichsbank's published acknowledgment of its responsibilities as ^-en(ier of last resort. Thus, when Vice President von Glasenapp and Director von Lumm were asked what would happen if the Reichsbank’s cash eserve were to fall below the statutory minimum of one-third of Its issue, they replied, "We should have to go on discounting bills. ould simply have to do it. We could not stop it. If we did, it Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis fl) uld bring about the greatest panic we ever experienced . ■ NoMc,Cc, Interviews, p. 35o* In its memorial volume the Bank, dis­ cing methods of control over its earning assets, said: "Since the hank cannot without great harm capriciously decline applications for that meet the requirements of the law, it is expected to regu­ credit late the demand for credit indirectly by determining the rate at which it stands ready to grant credit." R-Bo I, p. 125- See also Karl von Lubhh, Die Stellung der Notenbanken in der heutigen Volkswirtschaft, Berlin, 1909, PP* 19“20. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis jjj TtB-te Policy and the Cost of Credit From its foundation to the First World War, the Reichsbank lied primarily on its rate of rediscount to achieve its monetary ob- (1) Jectives<. In 1901 it expressed its judgment with respect to the k / The following brief excerpts from statements on the rate by top fficials during the whole period are illustrative s Von Dechend, president 1876-1890, "One can secure respect for his currency only if he is not embarrassed really to increase the rate of discount until pie see that one knows how to protect his metallic r e s e r v e SoB., l88l Volo I, p» 122. Koch, President 1890-1908, "000An increase in the rate is in fact the only effective means available to defend the gold reserveo” S0B0, 1898-I9OO, Volo III, p» 2017° Eavenstein, Presi­ dent 1908-1923, "Bank rate00ois the only effective means to protect the gold holdings of a c o u n t r y It should be mentioned that Haven- stein believed that the central bank would have to follow the market rate and could influence it only within narrow limits„ S.B., 1907-1909.? Vol. Ill, P« 2^13; Volo IX, p0 7072c Von Glasenapp, Vice President, and von Lumm, Director, "We increased the rate of discount. We con- sider that this measure is the only effective one<>” N0M0C0, Interviews, 1910, p. 357° rate in these words s "The rate of interest is the only effective in­ strument for regulating the domestic demand for money„ It is not in­ deed the only instrument to influence the movement of metallic money between home and foreign countries; but as all authorities acknowledge, ( 2 ) it is by all odds the most important and effective instrument „ It described the operation of the rate in these words s "A high rate of interest limits the applications for credit and operates on the one hand •Gfcinst an excess of expansion of notes and on the other against an ex­ cessive reduction in the reserves of the Bauko. a »At the same time, a -A 0I* ra^e offers a very favorable investment opportunity to inter- i°oal funds and is appropriate to draw gold from foreign countries Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis „(!) to prevent an export of gold to foreign countries. or TIT R.B. I, P- 125 The reserve ratio and market rates were the most important guides to policy. The Bank did not, however, follow any formula. The general level of reserves for example, was permitted to decline signi­ ficantly during the presidency of Richard Koch. The need for Judgment vbb expressed in these words: "In determining the discount policy of a central bank, account must be taken not only of the size but also of the character of the monetary demands made of it. An export of gold, requires sharper countermeasures than a temporary withdrawal of gold into domestic circulation. A monetary demand based on over speculation and overproduction requires sharper restrictions than a periodic in­ crease in monetary demand at the turn of the quarter or year which is grounded in the whole structure of the normal process of payments. These differences cannot be expressed, in numbers and therefore discount policy cannot be regulated according to a purely mechanical prinei- ple."^ w R.B. I. p. 126. Although the management of the Bank probably would have sub­ scribed to this statement of principles throughout the period under discussion, economic and monetary developments varied considerably. It is convenient, therefore, to divide the entire period into intervals ^aSe<^ on the character of problems that confronted the management* The Period immediately following the establishment of the Bank was marked ^ l&I* ge total reserves of which, however, only a smal 1 part was In the °r® gold. As a result, the rate was changed frequently and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CHART H A rEICHSBANK RATE AND RELATED FACTORS 1876-1885 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CHART H B REICHSBANK RATE AND RELATED FACTORS 1886-1895 METALLIC RESERVE RATIO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CHART H C REICHSBANK RATE AND RELATED FACTORS 1896-1905 METALLIC RESERVE RATIO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis SETAR TSERETNI CHART H D REICHSBANK RATE AND RELATED FACTORS 1906-1914 METALLIC RESERVE RATIO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis iv during this period in response not only to total reserves hut }\)Ad.6iL**y J.SO to the composition of reserves. The second period began early in the l880’s and lasted until th middle l890's. During this period the German economy was develop- jjjg rather slowly and the Reichsbank was seeking ways to invest its Only once was the rate increased beyond 5 per cent; the most common official rate was 3 per cent; and the Bank discounted exten­ sively at preferential rates as low as 2 per cent. After the middle 18901 s the German econoir^ entered a period of unprecedented expansion. A rate as low as 3 per cent became uncommon and rates beyond 5 per cent were frequent. The Reichsbank did not, how­ ever, increase its rate sufficiently to maintain its reserve ratio, which reflected progressive deterioration. The last interval was ushered in by the crisis of 1907 which led to a parliamentary inquiry and extensive discussions of Reichsbank policy, including methods of reinforcing discount policy. HI* A. Aftermath of Monetary Reform Otto Michaelis, a leading author -- with Ludwig Bamberger -- of the German Bank Act of March 14, 1875s felt that the English principle of limiting the fiduciary issue was sound, but that Peel's Act was too rigid and provoked or aggravated panics when the fixed limit was approached. He ried to develop the principle into a semi-automatic rule for regulating bank r&t6. TTo proposed that each bank of issue be required to pay a tax at the rate nf* ^ 1 > Per cent per year on its fiduciary issue in excess of a turn established for each such bank in the Act. ^ The purpose of cluded^a 0ri^ na^ Pr°P°sal was more complicated. For example, it in- *8 a reve^r°VxS^0n ^or a ^ Per cent tax on the entire fiduciary issue ^ions thatUe~ra^S^n^ measure* "^ut this and a number of other conrplica- ■were not adopted are of less immediate interest. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ~,r-ia-inn vas described in the Motiven advanced in support of the this provisxui — ----- legislation in the followinS terms: "The higher tax induces banks to counter a rising demand of the money market with rising prices, as is the natural rule on all other markets; it enables them - through the higher discount rate, which pays the tax - to meet the extraordinary demand which occasioned the rise; it operates through the increase of discount rates to attract capital and to moderate the speculative spirit; finally it gives the banks an interest to con­ tract their issues within their normal limits as soon as the extraordinary demand is past. By inducing banks to timely increases in discount rates, the tax will tend to moderate fluctuations in discount rates and without any disturbing interference will counteract the danger­ ous tendency of trade to retain the expanded issue of uncovered notes in circulation." (l) S.B., 1875> Vol. Ill, p. 655’ By "higher tax,1* Michaelis meant the 5$ tax which he was contrasting with the ifo tax mentioned in the preceding footnote. The emphasis on the word "timely” appears in the original. In the same paragraph of the report emphasis is also placed on the effect of the tax in gradually increasing pressure on the entire uncovered note issue. The second independent clause is ambiguous: authority to issue additional notes — not payment of a tax for the privilege — would enable the banks to expand. It would be consistent with the general line of thought to in­ terpret this clause as follows: "Authority to issue taxable notes enables the banks to meet the extraordinary demand without loss — because of the high discount rate, but also without much profit ~~ because of the tax." The semi-automat ic rule got off to a bad start* It is not clear that the management of the Reichsbank accepted the logic on which (2) it was based; but even if they had, the transition of Germany from I* r— — — — — H. von Dechend, the prospective president, had not been asked to testify«, In 1890, vice president - later president - R. Koch described principle as "important, but of doubtful v a l u e S e e his Die _eichsp:esetzgebung uber Munz-und Bankwesen, Berlin, 1890, p. 6l, note • Director von Lumm said the Bank had never been influenced in its policy by the provision. See his "Diskontpolitik", p„ 135* uOwlg Bamberger, secretary and influential member of the Reichstag ^®*ission on the Bank Act, opposed the idea. He favored giving the Karl^R11611^ Reichsbank complete discretion. See his letter to ferich, reproduced in part in the latter's introduction to erger's Geld-und Bankwesen, ppc 73-7^*’ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis silver to a gold coin standard created difficulties (1) This transi- the president of the Reichsbank had favored bi­ Xncidentally, ll ism. He not believe that silver could be-demonetized per- did ^nently* See Albrecht Sommer, Op. cit., pp« 100-125. tion was facilitated and indeed made possible by the French indemnity, but it was far from complete when the Reichsbank opened. The method adopted by the Reichsbank was to sell silver, received from circulation, 0n the London bullion market, and to use the proceeds for the purchase of gold to be minted and paid into circulationr But there was a hitch in the process. There was no fixed price for silver and the amount that could be sold without disrupting the market vras far less than the Reichsbank was acquiring<, As a consequence, silver replaced gold to a (2) considerable degree in the metallic reserves of the Reichsbank., On W) a.B. I, pc lhl Metallic keaerves of the Reichsbank i Million marks) Amount on hand Amount on hand Jan. 1, 1876 Purchased Sold Dec,31, I878 of Total I876-I878 I876-I878 Total Gold 3^6 78 320 180 38 Silver 100 22 M+7 292 62 Total khS 100 ^72 100 la other words, net, the Reichsbank received Mb39 million of silver 0m circulation and paid M^-86 million of gold into circulation. The ratio of reserves to notes in the first decade is given in the blowing table taken from R„B, I, p, 304o Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Ratio of Reserves to Notes, 1876-1885 G O L D M E T A L L I C Average Highest Lowest Average 1 Highest Lowest * Date i Date * Date i Date * 2/29 54.4 12/31 27.5 7^-55 6/7 86.4 1/7 62 >k 41.9 1876 31.4 ■2/15 35-9 12/31 25.O 75.27 3/23 83»3 12/31 63.2 1877 33.3 3/23 Ij-l.o 1/7 25.7 79.35 6/7 88,2 i/7 6k,9 1878 32-9 3/23 44,3 iP/7 22.5 80.0 3/23 96.3 10/7 65.6 1 1 8 8 7 8 9 0 30.7 6/7 36.3 12/31 23-8 76.47 6/7 84.9 12/31 64 c 8 1881 27.9 2/23 36.3 10/7 18.7 75.26 2/23 88.4 12/31 59-9 1882 28.0 3/23 33.2 10/7 20.9 73-49 3/23 84,8 9/30 61,0 1883 38.3 3/15 45.9 10/7 29.1 81.64 3/15 93-8 12/31 67-3 188^ 38.3 2/23 46.2 12/31 26,2 90.74 3/7 92.8 12/31 60.6 1885 38.1 12/15 47.7 1/7 27«3 80.57 6/7 91.2 1/7 63*1 ... ...... May 18, l879> the Chancellor suspended sales of sliver and compulsory withdrawal from circulation of the remaining Thaler coins. Commerce, however, continued to turn in silver. The Reichsbank also initiated practices to facilitate the (1) importation and to impede the exportation of gold. It facilitated TT)----------------------- RqB„ I, p. 146. gold imports by granting loans free of interest for 5 days, exception- ally for 8 days, on them. It also authorized some of its branches to P®y premium prices for larger amounts of gold* The official price was Hi j 392 per pound; but the management authorized payment of Ml, 393 for ®®ounts between M500,0G0 and M2 million, and Ml,393^ for amounts over with these minor encouragements to gold imports did not confirm expectations when they were introduced; and it was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis l) h rtly recognized that they could have only temporary success. ‘1 R.B. I, P* Therefore, interest free loans were granted only in special cases for amounts of a million marks or more.. Premium prices were suspended in 1881. The chief method of impeding exports was under certain cir­ cumstances to require prospective exporters of gold to secure the metal at the head office in Berlin rather than, as was usually permitted, at the branches in Hamburg or Bremen* This procedure increased costs of exporters "by the charges for conveyance from Berlin to the port. The management insisted that it never refused to pay out gold in Berlin and never charged a premium. Bamberger alleged that the Bank had on occasion imposed unnecessary technical difficulties in securing gold rapidly at (2) the head office, but this was denied by President von Dechend. m — — ------------ S.B., l88l, Vol. I, pp. 122, 125-126, The Reichsbank was confronted with a dilemma. Its metallic reserve ratio increased, its fiduciary note issue and earning assets decreased, and the money market was easy. Except for a "slow revival" in 1877 and "recession" in early 1878, Thorp describes the entire period from 187^ into 1879 as one of "depression". These forces pointed W. L. Thorp, Business Annals, New York, 1926, pp. 208-209* a reduction in bank rate. But the declining gold reserve, especially i*1 a country that had only recently established the gold standard, P inted to caution. These conflicting considerations explain the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis latively frequent changes in hank rate in the earlier years. When foreign exchange rates became unfavorable and the bank lost gold, it raised its rate rapidly, at times far above open market rates. When such pressures relaxed, the official rate was reduced to record low (i) levels. The Prussian Bank had never reduced its rate below if per cent. The Reichsbank reduced its rate to 3i per cent on May 18, 1876, and to 3 per cent on March 21, 1879. HI. b. Easy Money and Preferential Rates President von Dechend was concerned with the accumulation of reserves in the Reichsbank. In 1889, recalling earlier days, he said, "You will remember that for many years we simply did not know what would happen to the money that was accumulating in the Bank, so slight (2) were the opportunities for investment." XTj S.B., 1889, Vol. I, p. 591. He was particularly disturbed that foreign banks purchased large amounts of the best bills without, of course, assuming any re­ sponsibility to make funds available in difficult times. Meanwhile, the funds of the Reichsbank continued to grow and earnings became smaller. The core of the problem as he saw it was the independent banks issue. The Bank Act of 1875 allowed, these banks to continue, provided met conditions that were formally similar to those Imposed on the hsbank, including authorizations for tax free fiduciary issues of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (l) notes• ^ number of banks relinquished the right to issue notes immediately others did so subsequently. As these banks relinquished their lights of issue, their contingents of tax free notes were added to that of the Reichsbank. One of the requirements of the Bank Act was that the Reichs­ bank (§15) an<^- each independent bank of issue (§i|4) publish its rate of discount and its rate on collateral loans. In periods of slack busi­ ness and easy money - which was most of the time during the first two decades of Reichsbank history - however, these independent banks, fol­ lowing a full investment policy, actually bought bills at rates con­ siderably below their published rates. As a result, they acquired bills and the Reichsbank "lost contact with the open market" and acquired "idle funds". The Reichsbank complained to the Bundesrat, but after the latter decided that the practice was admissible, the Reichsbank it­ self began in January 1880 to discount below its official rate in . . . (2) periods of easy money. T?!- President von Dechend said the independent banks based their case on paragraph 13, subparagraph 2, of the Act which authorized banks of issue to buy and sell as well as to discount bills, whereas the para­ graph dealing with rates mentioned only the discount and the lombard rates. Bamberger, who participated in the discussions that resulted in the Bank Act, said that no one had thought at that time that the Bank would discount below its official rate. The purchase provision ad been included to facilitate dealings in very short bills for col­ ection, S.B., l88l, Vol. I, p. 121, von Dechend, and pp. 12^-125, ■Bamberger. The practice was questioned almost immediately in the Reichstag. In reply to Representative Bamberger who said the purpose of the manage­ ment waq +0 ^0 secure earnings, President von Dechend said, I can assure that at no time and under no circumstances has the management of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis gank taken an action for the purpose of paying the highest possible ^ vid.e;QJis * ° »But, gentlemen, I cannot be completely indifferent as to yhether funds of the Bank are employed or lie sterile in its vaults *. ^ I see it, the Reichsbank should not look for business but neither should it decline a proper opportunity to invest its idle funds in «(l) gafe, bankable paper. The preferential rate was discussed in the Reichstag again (2) on March 3, l88lo Attention was focused particularly on the events T S y — SoBo, 1881, ¥ol0 I, pp« 118»130R in August and September of 188O0 Between June 28 and August 3* the preferential rate had been reduced in four steps from 3j per cent to 2% per cent a Then, in two weeks, it was increased in three steps to per cent before preferential purchases were discontinued on Septem­ ber 3o The official rate was also increased from 4 to 5 per cent on August 18 and to 5i per cent on September K. Representatives Sonnemann and Bamberger said it would not have been necessary to increase the official rate so much if the Bank had not previously reduced the preferential rate so low In its zeal to acquire bills<> President von Dechend replied that a rumor was being circulated in August that the future of the mark was in danger« He ®*id, One can secure respect for his currency only if he is not em- ^rrassed really to increase the rate of discount until people see that / wn V knows how to protect his metallic reserve<.” Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis He said this principle had been proved in 1866 when, by in- reasing the rate 2 per cent in one day, the Prussian Bank had dissi­ pated fears as to the currency resulting from the outbreak of war. He gaid that exchange rates had improved immediately. The same results vere achieved with the dramatic increase in rates in August and Septem­ ber of l880* Within a few weeks the rate could again be reduced. The Reichsbank was annoyed that independent banks of issue competed through issuance of their own notes to the tax free limit in periods of easy money and then rediscounted at the Reichsbank - rather than issue additional notes, which would have been taxed - when condi­ tions tightened. Incidentally, the Reichsbank Commission which reported on the initial draft of the Bank Act of 1875 anticipated that the inde­ pendent banks of issue, operating for profit, would probably not be constrained by the tax on excess issues but that the Reichsbank, because of its unique public character and responsibility, would not lose sight of the principle on which the tax was based and would strive earnestly (l) to remain within the tax free limit. ITT S.B., 1875, Vol. k, p. 115^. The Commission was correct in assigning different motives to the Reichsbank and the independent banks of issue, but the results were the reverse of those forecast * The independent banks generally followed a investment policy. Instead of using their own taxable notes, however, they found it more profitable to rediscount bills at the Reichsbank. The latter, placing its social objectives above profits, ^creased its rate to 5 per cent and even beyond at times when there no prospect of exceeding the limit; and despite the tax, frequently tained a rate below 5 per cent when its circulation exceeded the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Its management, however, felt a sense of guilt when the limit limit- Qvr»peded frequently and by large amounts, vas The full investment policy of the independent banks meant, f course, that the Reichsbank had to bear the full impact of varia- (l) tions in the volume of notes. The Reichsbank did not see that their full investment policy negatived the power of the independent banks to expand or contract against the wishes of the Reichsbank and thus promoted rather than hindered its ability "to regulate the monetary circulation of the whole Bnpire" Instead, it said that the competition of the independent banks provided the market with cheaper money than the Reichsbank felt was justified. But the reaction of the Reichsbank was to join in making • -U-, (2) even more cheap money available. T2) ~ “ Bamberger pointed this out in the R e i c h s t a g S B,» iQQl, Vol«. X, p. 12k, — ' Perhaps it confused the issue of control with another on vhich it had ground for complaint. In effect, the law subsidized the in­ dependent banks-with an interest free loan in the amount of the tax free fiduciary issue, but this was a question of earnings or equity rather than of monetary control = Much later the Reichsbank explained the introduction of the eferential rate in these terms **Only when its (the central bank’s) °unts are large even in times of easy money can we be sure, in case threatened drainage of gold or under other circumstances which increase in interest rates desirable^ that it will be able to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis r B I, P* Director von Lumm was sharply critical of prefer- in his articles of 1912. See "Diskontpolitik", pp. 146-1^7. err is as applicable to the official rate as to a preferential of course, rate. There were additional reasons for establishing the preferen­ tial rate. One was a desire to acquire prime bills without being flooded with other bills. Another was a desire to maintain a relative­ ly stable official rate.^2) Stability of official rates was one of the ly. von Luimn, "Diskontpolitik", p. 146. criteria frequently employed in judging the quality of central bank managements. The criterion was not applied to preferential rates which were adjusted frequently to changing conditions in the money market. Eventually the Reichsbank secured an agreement from the inde­ pendent banks that they would not discount below their official rates when the Reichsbank indicated that it anticipated a loss of gold. This development was recognized in the law of June 1899, which authorized J, the Reichsbank to discount at preferential rates when the official rate was not over 4 per cent and tied the discount rates of the independent banks of issue loosely to Reichsbank rates. By this time, however, the long period of relatively easy money was over so that the Reichsbank did not in fact continue a preferential rate after the privilege was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (l) specifically granted "by lav. Tbe move to tie the discount rates of the independent hanks of sue to that of the Reichsbank was opposed vigorously by decentralizers agricultural interests* See Martin Goldberg, Geschiclrte der deutschen Munzgesetzgebung seit der ersten Erneurung des Reichsbank- ^ As a result of the amendment, three banks relinquished their right of issue. Of the four remaining indepen­ dent banks of issue, three apparently were able to escape the intention through a loophole in the law. The law did not bind lombard rates and these banks loaned on. the collateral of bills at. lower rates rather than discount at the rate bound to the Reichsbank rate. Nevertheless, their business did not keep pace with that of the Reichsbank or of commercial banks. See Ibid, pp. 109-112. See also K. von Lumm, "Diskontpolitik”, p. 187* In March 1884, the Reichsbank also established a preferential lombard rate on Reich and State securities. In part the purpose was to facilitate investment in such securities and in part to secure earning assets. But the money market was easy and no rush to borrow ensued. In the developing prosperity of 1889 and 1890, however, and again after 1895> the volume of collateral security loans increased rapidly and total lombard loans even exceeded the established limit. The preferen­ tial rate was removed on July 1, 1897j and the volume of lombard loans declined. HI* C. Prolonged Prosperity The general background of Reichsbank policy changed signifi­ cantly in the middle 18901 s. Germany began an unprecedented industrial commercial expansion. In modern terminology, investment - includ­ ing long-term foreign investment - exceeded domestic savings» These underlying forces were reflected in many money market Actors. Baak rate rose to higher levels. From 1886 to 1898 the offi- rate was as low as 3 per cent in all years save 1890, and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis rential rate was frequently as low as 2 per cent. The preferential preic te was abandoned in 1896, and after 1899 the official rate was reduced below b per cent in only three years (1902, 1905, and 1909)* Further- money rates were generally higher in Berlin than in London and •d r1*q- foreign exchange rates on major money centers became unfavorable more frequently; and Germany became increasingly indebted at short tenn*^1^ expansion was financed also in part by newly created money. See Hans Ueisser, "Der Internationale Geldmarkt vor und nach dem Kriege" in Weltwirtschaftliches Archiv, 1929> PP- 171* - 226*. On mar­ ket rates of interest, see the seasonal chart on p. 214*. Annual aver­ ages are shown in N.M.C., Financial Diagrams, Plate 9* On central bank rates, see Plate 10. Direct comparisons between official central bank rates should be used with caution because discount procedures varied and because of lack of uniformity in the instruments to which the sever­ al rates applied, Palgrave labels his elaborate tables in Bank Rate and the Money Market, New York, 1903^ "minimum" rate; but his averages are computed from official or public rates - at least for the Reichs­ bank for which I made sample verifications. On exchange rates, see R.B. II, pp« 210-211. On short-term indebtedness, see Enquete- Ausschuss, Die deutsche Zahlungsbilanz, Berlin, 1930, pp. 130-133* Reichsbank notes increased more rapidly than reserves, despite rapid development in the i^se of checks (.giro); 'the .reserve ratio decreased. These developments led to a subtle and gradual change of emphasis by the management of the Reichsbank in its discussions of what it considered its basic problems. During the period of easy money, the Reichsbank had large reseryes and the major complaint was inability to secure adequate earning assets because of the competition of the inde­ pendent banks of issue. It also objected that these banks assumed no responsibility for assuring convertibility; but this aspect received ^esB emphasis. As the reserve ratio decreased, emphasis gradually lifted from earnings to convertibility, What was considered excessive ^Petition of banks - by now, the so-called "great" commercial banks - V&s S1" i 1 1 adeplored, but the emphasis was on their failure to contribute Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis dequately -- by maintaining larger reserves -- to the costs of maintain­ ing convertibility. Instead of these complaints, a logician might have anticipated that the general theory of the management would have led it to adopt still lower rates over the period of easy money and still higher rates after the mid-1890's. Actually it seems to me that, though the management generally believed, it did not really comprehend and therefore follow consistently the theory professed by its vocal and literary representatives. Lack of comprehension was rooted in failure to distinguish between utilization of real resources on the one hand and of monetary resources on the other. As a consequence, day-to-day decisions were influenced by empirical notions of "just price*' and of political expediency. In retrospect one feels at times that expressed principles were an obscuring facade rather than a comprehensible rationalization. The Reichsbank did not reduce its official rate still more in the 1880’s primarily because the manage­ ment felt it had already gone as far as could reasonably be expected in this direction by reducing its rate to record low levels. It did not maintain a higher rate level after the middle 1890*s, partly because it was unduly sensitive to the common criticism that its rate was already higher than those of other central banks with which it liked to be compared, but primarily be­ cause of developments in the seasonal demand for currency. Seasonal Variations So important were seasonal variations in monetary phenomena that a brief analysis of them is essential to understanding Reichsbank Policy during this period. The problem arose out of the payment habits the German people. Before the First World War it had been customary 0 Pay rents, social insurance premiums, fees for professional services, uition, interest on mortgages, salaries, and even some wages on a Quarterly basis and in cash. In the fall and winter additional cash Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis was tice ublication of their year-end balance sheets. gee my, "Der Geldumlauf in Deutschland1' in Bankwissenschaft, Berlin, 1933, Vol. 10, pp. 257-264. Given these habits, seasonal variations in interest rates, cash in circulation, or both were bound to occur. The advantage of an elastic currency to meet temporary needs was widely discussed and What is more important, the management of the 12T See, for example, J. Landmann, System der Diskontpolitik, Kiel #nd Leipzig, 1900, pp^ 126-130; K. Helfferich, Studien fiber Geld-und Bank- wesen, Berlin, 1900, pp> 165-167, 213-218; F. Bendixen, Geld und Kapital, Jena7'i922, pp. 146-149, 158-162, 166-182; J. Plenge, Diskontpolitik, pp. 166-172, 379-380. Reichsbank was aware that, to cite its own words, "There can be no doubt that no limitation of note issue could prevent the Reichsbank from satisfying the fluctuations of money demand, rooted as these fluctua- (3) tions are in our economic life *" T3T R*Bc I , p, 218, Nevertheless, it is clear that the Reichsbank, especially for the period 1886 to 1912, responded to these seasonal variations by in- creasing its rate in the fall and decreasing it after the turn of the year, During this period, the Reichsbank decreased its rate 51 times increased it 4 5 timese Of the decreases, only 1 was in the second k*1** of the year (from 5J to 5 per cent in July 1900); of the increases 5 vere in the first half of the year (from 3 to k per cent in May May 1893, and April 1898; from 4- to kj* per cent in June 1899j and fr°m ^ to k Per cent in June 1903). Of the 51 decreases, 19 were in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis January and 19 in February; of the 45 increases, 11 were in September, 15 in October, and 7 in November. There were only 4 years without a reduction in either January or February, and only 8 years without an increase in either September or October/1^ In 1911 the Reichsbank published an analysis of TIT The seasonal ebb and flow of pressure was at times even greater than that revealed by these data. Discounting at the private rate, for example, was made more expensive or even suspended at times when seasonal demands for currency were heavy. the causes that induced it to increase its rate. Of the 42 increases from 1886 to 1910, only 4 were attributed to loss of gold or unfavorable exchanges, 2 ( ) 25 to increased domestic demand for money and 13 to a combination. R»B» 11? P* 222. See also details on pp. 214-221. The corresponding figures for the period 1876-1885 were 9 because of external factors, 3 because of internal factors, and 4 because of a combination. The enthusiasm aroused when one first sees these tables is dissi­ pated by study of the role of the Reichsbank. Initially one feels that he is being taken behind the scenes to observe the actual determination of policy. After comparing the detailed table with other information, one concludes that it is merely a tabulation of some of the easily ascertainable objective facts that were relevant. It does not include all of these. T51----------------------- For example, Havenstein, S.B., 1908, Vol.229, pp. 2413-2415, said t an important reason for not reducing the rate in 1908 was that the e of new bills drawn was so large, but that magnitude is not given ln the table. The tables are not without value, however. The summary table, f 0 example, relates only to increases in the rate. This helps confirm a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis dgment reached on the basis of other information that the Reichsbank upon to justify increases but not decreases in its rate. ^ called One is tempted to fall into the trap that caught the management of the Bank in drawing conclusions from the tables. One such conclusion is that domestic developments gradually became more important and inter­ national developments less important. The basic problem of the Reichsbank after the middle 1890's, however, arose from the fact that Germany developed more rapidly than most other countries. If one has arrived at this judgment in advance, the detailed table will confirm it by showing that the Reichsbank reserve ratio declined even though its rate almost uniformly was higher than the other rates listed. If, however, one does not start with this judgment — which comes from comparisons over long periods rather than comparisons from rate change to rate change on which the tables focus attention — one is apt to conclude that the rising domestic demand for currency alone was the important development. The basic problem was obscured because, though the manage­ ment knew much about seasonal variations, it did not comprehend their real significance — or lack of it — for monetary policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis What extenuating circumstances account for such seasonal variations in bank rate despite the professed principle of elasticity? perhaps most important was an inability to adjust to the speed with vbich most economic magnitudes were increasing. Growth was so rapid that almost every fall the Reichsbank seemed to be confronted with something more than a seasonal increase in currency, especially because attention was directed to the absolute amount rather than ratio to trend. Even as astute an observer as Karl Helfferich greatly under­ estimated the rate at which the circulation would increase in the first (i) decade of the twentieth century.. At the same time, the management In commenting on the increase in the tax-free fiduciary issue from 293.U to ^50 million, effective January 1, 1901, he judged that it would not be necessary in the ensuing decade to exceed the limit as frequently or in as large amounts as had been necessary before. K.». Helfferich, Pp., cit,, p» 218. Yet by 1906 the amount and irk.1907 the frequency of taxable issues established new records. Helfferich was fully aware that Micha^lis, the father of the Bank Act, had greatly underestimated the eventual expansion in circulation when the original limit was established. See Ibid,, pp. 15^-160, 167-173° was not insensitive to the running criticism because its rate was always above that of the Bank of France and usually above that of the Bank of England. It tried to keep its rate as low as possible and reduced it as soon as it thought it could; that was usually when currency began to return after the turn of the year 0 Another factor in the autumnal rise in rates was the fear of e management that the large increase in circulation might imperil ready convertibility of notes into specie. They were particularly con­ cerned as to the consequences if a large sudden demand were to coincide Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis kQ - . (l) with the seasonal peak. rphe threat or outbreak of war was one such emergency they had in v iron T.nmm. Dip S+,e=>l 1 •nru? dpr Nnt.pn’hankpn. na.f5sim. pan. A** Ueltkriegs, rauuxuii CL1XU. xjcxj^^s, A.y.v.y, jj . | - eu. ujajxc wj.xuucu xu. ^ iUi a,ilc^dote is told that during the Morocco crisis the Kaiser asked several banking and financial authorities whether Germany could finance a war with a major power. The apparent answer was a weak, apologetic "no". The Kaiser is reputed to have replied: "When I ask vou this question again, gentlemen, I expect a different answer," Die Bank, 1912, P° 286 0 A related factor was the concern of the management with the legal limitations on note issue. Increases in the circulation took the form of Reichsbank notes, Treasury notes, and coin, and therefore had a dual impact on both the reserve ratio and the fiduciary issue. The management was not sympathetic with the fiduciary limit, but it was restive because it knew that frequent and large issues of taxable notes violated the spirit and intention of the law. On the other hand, it was very much concerned about the reserve ratio, even when it exceeded the legal minimum; it was particularly concerned about the gold reserve ratio concerning which there was no legal minimum as such. There were many proposals and the Reichsbank introduced a number of new procedures to deal with the quarterly drain.- To under­ stand the changes in procedures it is necessary to recall several in itial differences between the two basic means of access to the Reichsbank: discounting and borrowing on collateral or lombarding, Relevant differences were: first, that the rate on loans was \ to 1 cent higher than the discount rate; second, that funds initially ould be borrowed for the exact period that they were needed, whereas ill had to be discounted to maturity; and third, that the Reichsbank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis uid use discounts but not lombard paper as collateral for its notes n u vhs based on and the management believed in the "real bills'* the ia>' doctrine. Under these conditions, banks tended to discount their short bills and to borrow rather than discount longer bills to.meet the quar­ terly d r a i n / T o discourage borrowing, the Reichsbank changed its ^ Of course, they also discounted long bills when they expected a rise in the discount rate. See my "Die Politik der Deutschen Reichs­ bank seit der Stabilisierung” in Weltwirtschaftliches Arctiiv, Vol. k2, 1935> P* ^9, note 2, procedure, in the l880's by charging a minimum of three days’ interest on loans extended on the last four and the first business day ,of each month. In l88l the minimum was increased to 5 and later to 8 dayso In 1887 the minimum interest charge for borrowing that began during the (2) quarterly drain was set at lk days 8 The results did not exactly m --------— — — R.B, I, p. 116. meet expectations. The banks continued to borrow; but since they needed the funds for only 3 or 4 ‘days, they promptly reloaned them for the en­ suing 6 or 7 days as call money. As a consequence, the strains at the end of the quarter were not relieved but were followed immediately by extreme ease in the money market. Apparently the practice was abandoned for a time; it was reintroduced in March 1905. ^ TT5---------- ------------- P-B. Ill, p. 26 Discussion of seasonal variations continued especially when neval of the Reichsbank charter was under consideration, The nature &O1B0 j i tne proposals is reflect,ed in one of the limited number of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis estions on which witnesses were asked to. testify in the Bank Inquiry of 1908: Question V. Is it desirable to take into consideration — a diminution of the demands on the Reichsbank? A. Through a diminution of the credit demands of ljusiness, especially at the quarterly periods? What measures might be taken to cause a spreading out of the quar­ terly requirements by altering the time of payments (mortgage-payments, salaries, rents) which tradition­ ally fall due on the first day of the quarter? Would it be desirable to enhance the cost of obtaining money from the Reichsbank on collateral security, at the close of the quarter, by increasing the number of days for which interest is charged? (l) TO N.M.C«, German Bank Inquiry of 190o, Vol. I, Washington, 1910, p* 8 and passim. Almost without exception the witnesses testified that limited success could be expected from efforts to change the habits of the people, and they opposed the proposal to make borrowing more expensive at quarter days. As a result of the inquiry the system of the fiduciary limit was modified to allow for seasonal variations by establishing two magni­ tudes, one of which (M750 million) was applicable to the quarterly periods and the other (M550 million) was applicable at other times. In principle this made some sense, but since the difference (M200 million) was less than the actual swing in circulation, the quarterly limit was the more restrictive. G. H. Loewy, a banker, thereupon revived the suggestion that been so generally opposed in 1908 that the cost of lombard loans be increased at the quarter days. He suggested that the pressure be limited borrowing because he accepted the self-liquidating theory of commer- CijLl Paper and because the law did not admit lombard loans as collateral Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis for notes. This suggestion was followed by the Reichsbank C H Loewy, "Der Zinsfuss im Lombardverkehr der Reichsbank" in Nov. 15, 1910, pp. 61-62. jjay 1911 when it established a new rule on borrowings in excess of (2) yQO 000 that spanned the "quarter days". The new rule required 7*2) R.B. Ill, P- 26* that in general interest must be paid for ten days in addition to the period for which the funds were actually borrowed. Again the results were somewhat unexpected. The demands on the Reichsbank - to use the phrase of the Bank Inquiry - were not reduced. The new policy made borrowing after the 27th so expensive that banks shifted to discounting bills even though they secured funds for a longer period than they de- (3) sired them, as is shown in the following table.. To some extent m Die Bank, 1911, P* 532, contains a statement that "before the change of June 1911 a bank would prefer to lombard for 10 days at 5 per cent rather than discount for 20 days at 4 per cent; after the change it would be cheaper to discount for 20 or even 30 days at 4 per cent rather than lombard for 4 days at an effective rate of 17^ per cent. (it must be remembered that the bank could relend the proceeds of the discount for 16 or 26 days*) See also, Die Bank, 1912, p. 109° banks also borrowed on the 27th in anticipation of needs. As a conse­ quence, borrowing increased earlier and the monetary ease which followed the quarter days continued for a longer period. Furthermore, the great differences between costs of borrowing at the end of the quarter and at other times made the maturity date of bills important and led to dif­ ferential rates. Whereas formerly all bills with a maturity between and 90 days were discounted at the same rate in the market, schedules ates were now established based on the maturity dates of the bills. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis p-iscounts and Loans at the Reichsbank before and after ‘— the Change of Policy in June 1911 (Unit: M 1,000,000) Before the Change After the Change ---------- Discounts Loans Discounts Loans 1910 June 23 837 76 1911 June 23 92 k 55 30 1,188 256 30 1,355 7^- July 7 1,036 120 Ju]^ 7 1,163 56 Sept. 23 1,112 70 Sept* 23 1,247 51 3P 1,53*+ 210 30 1,785 91 Oct. 7 1,3^ 117 Oct. 7 1,511 63 Dec. 23 1,052 96 Dec. 23 1,389 69 30 1,324 371 30 1,793 117 1911 Jan. 7 1,106 117 1912 Jan, 7 1,566 69 Mar, 23 890 60 Mar, 23 1,075 64 30 1,315 261 30 1,652 ill Apr. 7 1,130 125 Apr 0 7 1,458 78 It should perhaps be mentioned that the Reichsbank did not adopt the subsequent suggestion of Mr. Loewy that it increase the diffi- (1) culty of discounting short bills before the quarter drain* Could it TT] "Diskontpolitik" in Bank Archiv, August 15, 1912, pp. 357*3^0, especially p. 358- For suggestion of N. E» Weill that the Treasury issue M600 million of notes at quarter days, see "Reichsbank und Kreditbanken" in Bank Archiv, May 1, 1912, pp» 235-24-2 „ For a criticism of this proposal, see J, Plenge, Diskontpolitik, pp= 167, 380, Most ®odern analysts would probably agree with Plenge’s general judgment j 7) on most of the suggestions for dealing with the quarterly n.„*alles vergebliche Muhe!” ^e» that it appreciated that to do so would have placed it in the anomalous P sition of agreeing that the expansion in currency had to be permitted and y t of making more difficult each successive method employed by the economy secure the currency? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2„ Other Facets of Policy Although the discount rate remained the primary instrument of v the management was disturbed by the persistent reduction in its policy) reserve ratio and coniplaints that its rate was generally higher than it had been before the middle 1890’ s and higher than rates at the Bank of gngland and especially at the Bank of France. The Reichsbank, there­ fore initiated certain changes in operations and in legislation to re­ inforce the effectiveness of its rate policy and to increase its re­ serves- Just after the turn of the century it was also confronted with a domestic crisis in confidence. (a) Crisis operations The Reichsbank discharged its obligation as lender of last resort in the series of bank failures that culminated in June 1901 in the failures of the Credit institute for Industry and Trade in Dresden and of the Bank of Leipzig* Runs developed on many banks. The Reichsbank discounted and loaned liberally to enable other banks to maintain payments and participate in appropriate supporting actions» It maintained its official rate at 3\ Per cent, to which it had been reduced on June 18, despite an unprecedented increase of M323 million (to Ml, 175 million) in earning assets and a decrease of over M1Q0 Million (to M900 million) in reserves during the last week of June. (b) Open Market operations Before the turn of the century, the German govern- aent occasionally borrowed from the Reichsbank in small amounts and for hort periods through the medium of Treasury bills. Beginning in Sep- e®ker 1900, the amounts were increased. The first large extension of dit to the government was liquidated from the proceeds of the Reich 611 April 1901. In the ensuing years, however, the government was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis nv a continuous borrower from the Bank in widely varying amounts virtuaiiy » 11200-^-00 million, exceptionally even up to M500 million. Up tO 1 <jhe maximum of discounts was in the order of M2 billion, In February 1901, the Reichsbanfe for the first time sold soi’i3 of these bills to influence market rates of discount. In its official memorial volume published in 1925, the Reiehs'bank explained this early operation as follows: MBy means of rediscounting Treasury bills* it was possible for the Reichsbank to withdraw money from the market and thereby force up private rates when it appeared to the Bank that they were being held artificially low. In this way the Reichsbank, while simultaneously relieving its own position, could increase the in­ fluence of'bank rate on foreign exchange rates and thereby, under cer- (2) tain conditions, smooth the way for a reduction in its rate,’* 151 ---------- R.B. Ill, p. ,10. Ordinarily sales of securities by central banks are associated with increases in the rate. It seems contradictory to sell securities, forcing market rates up, to "smooth the way1' for a reduction in bank rate, Apparently the actions of the Reichsbank were based on a concern for its own position, primarily its reserve ratio. Sales of Treasury hills would tend to increase the reserve ratio: by reducing liabilities,, An increase in market rates would tend to make Berlin a less attractive aarket in which to borrow and a more attractive market in which to lend., would. thus attract international funds for investment., To the extent the^e funds took the form of gold, reserves would rise and the re- 80j*Y0 -p 1 . a 1(*- w°uld be increased still further, A high reserve ratio tVlQ- n enablfe the Bank to lower its rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Apparently the Reichsbank feared that an initial reduction its rate - which would seem to be a direct approach to the problem - would drive market rates still lower* Since its desire was to reduce the differential between hank rate and market rates and to attract gold, it began the process by forcing up market rates. Although the Bank said this operation in 1901 was successful, it admitted - without realizing the implications - that the increase in the reserve ratio was caused primarily by a return flow of funds from internal circulation0 In other words, it was seasonal in character as is shown in Section III-C-1. The Reichsbank explained the open market policy of 1905 in more conventional terms. Treasury bills were sold ’’under suitable cir­ cumstances to counteract anticipated tension in its own condition with­ out resorting immediately to an increase in the rate»” In other words, sales of securities supported bank rate or smoothed the way for an increase - rather than a decrease. Although the Reichsbank sold securities from time to time to withdraw funds from the market, it did not have a continually firm con­ trol over its investment portfolio. Apparently it had little or no choice in acquiring Treasury bills. It acquired them at the official rate when the government needed f u n d s T h i s meant in effect that RoB, h i , pp. 12, 19; ILMoCoj Interviews, p. 3^+9, K. von Lumm, diskontpolitik”, *pv l48« the market had access to Reichsbank credit without the necessity of discounting. As the Treasury spent the funds it had borrowed from the Reichsbank, they became available to the market* It should not be in­ erred, however, that discounts and Treasury bill holdings varied in- sely. Frequently bill holdings increased when the seasonal demand Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis f r currency rose. Discounts then increased also, but not as much as 0uld have been the case if holdings of Treasury securities had re­ mained constant. The Reichsbank did not have complete control over re­ ductions in its portfolio. The government could take the initiative in this direction by repayment from tax receipts or the proceeds of refund­ ing operations* (c) Devisen policy Until 1898 the Reichsbank dealt in foreign exchange primarily to enable its non-banking customers to buy and sell foreign (1) monies at all its branches. In that year it began to accumulate ITT This is the reason given in R.B., III, p. 37* From the relatively large holdings shown in R.B. II, pp. 158-159, and from the introduction of the preferential rate on prime bills, it seems not unlikely that earnings or some other factors were also involved from, say, 1880 to 1887. Thereafter until. 1898, however, the portfolio was small - from M2 to M3 million as contrasted with an average of 17 million and a high of 31 million in 1886, The new policies inaugurated in 1898 and 1908 are reflected clearly in the data. long bills in foreign currencies and deposits with foreign correspon­ dents - primarily English - to be in position to influence foreign ex­ change rates, especially through sales to prevent them from reaching the gold export point. Under this new policy both the portfolio of foreign bills and correspondent balances were greatly increased« Aver­ age bill holdings of 1907 were M44 million and average balances were M20 million. The Reichsbank drew heavily on these foreign assets in the crisis of 1907. (d) Issuance of small notes At the time of the Morocco crisis in 1905; the paper m°ney of Germany consisted of bank notes with a minimum denomination of and Imperial Treasury notes in denominations of M5, M20, and M50, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis total issue of Treasury notes, however, was limited to M120 million, The ^ amount that had not been changed since January 1, 1891= Primarily as a result of this limitation, most of the money of these denomina­ tions was in the form of gold coinso The Morocco crisis created a favor­ able atmosphere for the Reichsbank to secure authority to issue notes of gmaller denominations. On February 20, 1906, it was authorized to issue notes in denominations of M20 and M50. On June 5, 1906, Imperial Treasury notes of these denominations were discontinued and the Treasury was authorized to issue notes of M10 as well as M5» Parliamentary opponents insisted on a limitation of M300 million on the total of small notes; but the chancellor relieved the Bank of this restriction on quarterly days after 1911 until the limit was removed by law in 191.3* ^ ID ~ The story of the episode is given in M. Goldberg, bp> cite, pp. 129-13^' There were widespread differences of opinion concerning the nature, advantages, disadvantages, and implications of the issuance of Email notes to replace gold coin in the domestic circulation, Con­ trast, for example, J* Plenge, op, cit», pp» 142-150 with G* von Schulze-Gaevernitz, op. cit-, pp« l8o-l8l«. (e) Increasing minimum clearing balances In October 1906, as reserves declined and the rate was increased, the Reichsbank, in an attempt to attract cash, increased the minimum balances required of the customers who used its clearing (giro) system. It also announced that the Head Office would henceforth establish uniform rules concerning such minimum balances, rather than leave them to be determined by the branches , One factor in establishi­ ng the minimum was the average volume of transfers (by red checks); the other was the earnings of the Reichsbank from the discount and lom- rd business done with the customer» The first factor, it might be tioned, was akin to a reserve requirement based on debits to the a°count 5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Dr. Koch probably was led to this move because he was an , • p. expert in the field of collections. He was probably think- opc^’^' about securing compensation for the services rendered by the ing iChSbank rather than about monetary control. What he saw was a per- siStent increase in the debits and credits per mark of average clearing balance from 237 in 18?6 to 494 in 1906; or, in other words, a decline from three days to one day in the average period for which a deposit remained in the account. 1 r.B. Ill, Appendix pp. 48-49 We do not have frequent periodic data to establish the effects of the new policy. We do know, however, that although the sum of the minimum private clearing balances increased from M82 million on Septem­ ber 15, 1906, to M114 million on March 31> 1908, the total private clearing balances over the same period decreased from M288 million to (o\ M260 million, although "float” increased by M34 million. Perhaps some T2T R.B. Ill, Appendix pp. 5^-57■ private customers felt they had been carrying excessive balances until application of the new rules taught them what a "reasonable" balance was, and (3) n Perhaps others found the new procedure too expensive. 753---- ------ ------------ nuiriber of private accounts continued to increase after Feiie° nea^ly as rapidly as before. R.B. Ill, Appendix p. 48. Arthur Systprr wany large institutions inaugurated a special clearing throu t3lemsel'ves and that other clearing customers sent payments the — j - - ■ — — postal system. Op. cit., pp. 29-30* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis jjj- d . Crises and Reappraisal of Policy The tight money markets in the winters of 1906 and 1907^ ^ Bank rate was increased to 7 per cent on December 18, 1906, and to 1 pgr cent on November 8, 1907* as a consequence of the money panic in the United States. into flame smoldering dissatisfaction with the management of the fanned Reichsbank. Reactions were prompt. On January 8, 1908, Dr. Havenstein, of the Seehandlung (Prussian State Bank) replaced Dr. Koch as President of the Reichsbank. On January ±h, the government announced President (2) that it would launch an inquiry into the German banking system* 12) The announcement Was in response to an interrogation made of the chancellor on November 22, 1907* by Count von Kanitz as to what he pro­ posed to do to counteract the inconveniences resulting from the exist­ ing high rate of discount at the Reichsbank. The Reichsbank prepared a six-point outline to guide the discussions. The inquiry was conducted by a commission consisting of Havenstein as chairman, von Glasenapp, Vice President of the Reichsbank, as vice chairman, and twenty-three members selected from German banking, industry, trade, and education. Representatives of the Imperial and State governments attended the meet­ ings. Translations of the proceedings of the full commission were published in two volumes by N*M.C*, German Bank Inquiry of 1908, The outline is published on pp. 7*8 of Volume I. A brief summary of the work of the commission and of the amendments to the Bank Act influenced by it are given in R*B* III, pp. 26-3*+. See also M. Goldberg, o>p° cit, PP. 136-156, 166-1737------ ------- The new president gave the Reichs'tag'.'.his views on bank rate in the following words 1 "it is not the policy of a central bank which makes the discount rate, rather, bank rate is essentially deter­ mined by the economic circumstances of a country. In the first instance it is dependent on the country's capital and credit conditions, and on its position in the yorld economy, and therefore on the conditions in the international money market. In this connection, bank rate is also the only effective means to protect the country's gold reserve against domestic as well as foreign withdrawals that are unjustified, not required by economic conditions, or dangerous. I emphasize repeatedly, therefore, that the central bank, in its Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis interest and discount rate, can generally only follow the rate in the money market. It can affirm the market rate Taut cannot determine it* Only under certain cir­ cumstances and within measurable limits can it influence the market rate." (l) 1907-1909, Vol. Ill, p. 2413; of. Vol. IX, p. 7072. The phraseology as well as the ideas are reminiscent of the testimony of the regents of the Bank of France before the parliamentary (2) inquiry in 1865 , with which Havenstein undoubtedly was familiar, 12) ’ " See my "Die Politik der Deutschen Reichsbank seit der Stabilisierung" j_n Weltwirtschaftliches Archiv, Vol. k-2, p. ^67, and "Bank of France Pnlicv" in The American Journal of Economics and Sociology, Volo 11, 1952, pp. 238-239. ~ ~ — - - - This approach probably explains why the Reichsbank did not launch a frontal attack on what it considered the two basic aspects of its problem. These aspects were to increase the gold reserve of the bank­ ing system - especially that of the Reichsbank - and the influence of the Reichsbank in the money market. A frontal attack would have in­ volved granting credit somewhat less liberallya Specifically, the Reichsbank might have kept the money market under firmer control by not reducing its rate so promptly in the summer. Such a program would have prevented market rates from falling so low. Instead, however, the Reichsbank tried to compete with the market by reducing its own rate, 3y adding funds when the market already had a plethora, it tended to viden - rather than narrow - the spread between the bank rate and the Market rate on prime bills. Perhaps the chief reason for not adopting this frontal attack was that the Reichsbank confused monetary policy ith credit policy. This confusion is reflected in the reasons advanced the many-sided but unintegrated program of reform proposed for the rman monetary and banking system. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis There was widespread, though not of course unanimous, agreement of issues. One of these was to make notes of the Reichsbank on a number uj. tender. The purpose, as in the case of issuing notes of smaller was to draw gold from circulation into the Reichsbank. It ominations, vas that Reichsbank notes were in fact accepted as a means of recognized was felt that a crisis might bring with it refusals to payment, but it accept them and that making them legal tender during a crisis might not only take time also aggravate the crisis. The notes were made legal but tender on January 1, 1910. A second point on which there was general agreement was that the Reichsbank should pursue a more active gold policy, tolerating if not pro­ moting a wider variation in the effective price of gold. It was recognized that relatively little could be accomplished without raising doubts as to the monetary standard. At the same time, it was felt that judicious exten­ sion of loans free of interest could at times bring to Germany gold that might otherwise go elsewhere. Such loans had been considered effective in promoting gold imports in 1901. Another practice viewed with favor was the payment of slight premiums on gold bars and foreign gold coins. The Reichs­ bank began a rather aggressive policy in this regard and began to show con­ siderable losses for the first time in its gold operations. TT3------- --------------- M1 7-*^* ^ • PP* 3^+-35* Profits on gold operations had varied between lQn \ ^ an(^ M221,000 (1892). During the entire 32-year period (1876- lQoft total profits were Ml,227,000. Losses from gold operations in In t 1909’ and 1910 Were ^7,000, Ml67,000, and M128,000, respectively. _ ° er wo:rds, the losses in these three years wiped out half of the its of the preceding 32 years. Light weight coins also were delivered to gold exporters. On °ther hand, neither significant departures from par such as were /ed by the Bank of France which could redeem in silver, nor the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ation of a gold market, such as existed in London, was recommended,' v r 7. Schilling* Uber die Frage der Errichtung eines deutschen ^idmarktes, Karlsruhe, 1913- Such minor blemishes on the simon pure gold standard as were adopted were among the curiosities of the years preceding the First World War. Central banks used them to compete against each other to attract and retain gold. Yet collectively they tended to cancel each other so far as the distribution of gold was concerned. For example, the effort of one central bank to retain gold by paying out light weight coins could be nullified by the premium prices paid by the recipient central bank. Another recommendation was that the Reichsbank develop still more its devisen policy. It will be recalled that liquidation of a substantial part of its holdings had proved useful in the crisis of 1907* The Reichsbank, therefore, created a foreign exchange depart­ ment whose director attended the exchange to supervise the determina­ tion of rates. It also increased further its own operations. Director von Lumm cited as another reason the desire to have a defensive measure against possible liquidation by foreign banks, especially central banks, (2) of their large and rising portfolios of mark bills. In 1911 average T2T K. von Lumm, Die Stellung der Notenbanken, p, 39 holdings reached a peak of Ml62 million of bills (15 per cent of all hills held) and M78 million of balances. These holdings were called 011 meet part of the deiqand arising from the Morocco crisis, After hat, though the Bank remained a relatively large dealer and investor foreign bills and currencies, it tended to prefer gold« On July 1, 9 it held M128 million of foreign bills and M78 million of deposits Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis the outbreak of war, most of the former were collected, In part ter through neutral countries, whereas enemy countries blocked most cf the latter * Despite some exaggerated claims to the contrary by others, the Reichsbank, initially at least, recognized that foreign exchange opera­ tions could not affect Germany's fundamental balance of payments p o s i t i o n . Holdings of foreign exchange were the practical equivalent R*B. I, PP* 99-102. It recognized that purchases of foreign exchange would tend to force up the exchange rate and might lead to an export of gold, which is the opposite of what it desired. of gold, were accumulated instead of importing gold, and could be sold instead of exporting gold. The distinction between gold and foreign exchange was not unimportant at a time when gold movements were watched closely and exerted great influence on business decisions» Tactically, of course, dealings in foreign exchange enabled the Reichsbank to in­ fluence rates within the gold points and to smooth out erratic fluctuations. The Reichsbank gradually developed a number of related pro­ posals to deal with deposit banking* Point VI of the bank inquiry asked whether banks should be subjected by law (l) to reserve require­ ments ajid (2) to publishing periodic balance sheets in prescribed (2) forms. - ^•M.C., German Bank Inquiry, Vol. 2, pp, vii-ix On October 15, 1908, as the commission was discussing Point Chairman Havenstein announced that he had received a coimnitment 111 ei&ht large Berlin banks that they would voluntarily publish Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ^monthly statements. This agreement related to the second question The latter is printed in German Bank Inquiry, Vol. 1, pp. 687-689- and further discussions of the entire Point VI were postponed* When they were resumed on November 23, 1909,? the witnesses called attention to certain excesses and evils, but they did not, in Havenstein?s words feel "it necessary to set fixed limits by way of legislation, limits •which are likely to put a restraint upon that freedom of movement which (2) is, after all, indispensable to living forces.” Havenstein, too, T2I N.M.C*, German Bank Inquiry, Vol, 2, p. 801. hoped it would not be necessary to have recourse to legislation; but he warned that the evils had to be rooted out. Many banks joined - some not voluntarily - in publishing bi­ monthly statements. But the objective of publication - sufficient pressure to increase primary liquidity - was not achieved. As von Lumm expressed it in 1912: "Despite the demand raised at the bank inquiry for an increase in primary reserves, they have not in the interim been (q ) improved in the least." xtj ---------------- K. von Lumm, "Diskontpolitik”, p, 182. The Reichsbank, therefore, advanced a number of ancillary pro­ posals to make acceptance of its reserve proposals more palatable and to increase its influence over money rates. The Reichsbank*s analysis prj--------— _ _ Presi^16 ^roP°Bals apparently were discussed with bankers privately by lugs f* havenstein over a period of time, probably in the monthly meet- vised0 th^16 cent’ral committee, a statutory group of stockholders who ad- "banks tLdirectors and which included individuals from most of the large 8erie' ^h.ey were published by director von Lumm as the fourth in his s of articles in Bank Archiv, See "Diskontpolitik", pp, 179-18?. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis evil ran in "t^le following terms. The great hanks had expanded of tne nnously* much more so than the Reichsbank. They competed aggress for deposits by allowing high rates of interest; but this meant in turn that they had to keep fully and continuously invested. As a con­ sequence every demand for currency, as at the end of the year, forced them to rediscount at the Reichsbank or borrow abroad. Then as they funds, they became independent of the Reichsbank and invested acquired these funds at whatever rate they could secure. By thus forcing the prime rate down, they encouraged abuse of credit, speculation, new issues - including foreign issues, and excessive and unsound credit extensions. The proposed solution was based on this analysis„ If the hanks would enter a binding agreement on maximal rates they would allow for deposits - tying the maximum to bank rate - they would save expenses and would not be forced to compete so actively to employ their funds. If, then, they would also agree on minimum rates of discount - again tying the minimum to bank rate - they could maintain income without ex­ tending questionable and .unsound credits. And finally, the reduction in credit would enable the banks to increase their reserve deposits and the Reichsbank its gold holdings. The minimum reserves that the Reichs­ bank proposed were to be maintained only on the average so that banks could themselves meet part of any drain without being forced immediately to rediscount at the Reichsbank. The expected accomplishments would be to reduce the size of the ReichsbankTs job, to ^increase its ability to handle it, and to make its rate effective. The expected costs would be essentially only the elimination of .unsound credit. The whole analysis and each point in the solution were attacked Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis harply and at onoe, especially t>y Professor Plenge of Leipzig. ^ T IT Initially in the same magazine in which von Lumm had published his •eS See Bank Archiv, Vol. 11, 1912, pp. 219-226, 2b2-2k6, 251-261. serl g'became dissatisfied with the treatment he received from the edi- and published a book on the subject: Von der Diskontpolitik zur y ^ p f t . uber den Geldmarkt, Berlin, 1913. Plenge pointed out that a reduction in credit and acquisition of cash by a banking system are not identical, since loans would be repaid with deposits as well as cash. The reduction in credit would have to be a multiple of the acquisition of cash. To follow the recommendations of the Reichsbank until they resulted In a significant increase in its gold hold­ ings, therefore, would produce not an almost painless transition but a severe depression. Plenge also pointed out some of the implications - in­ cluding that of rationing and its administration - and disadvantages of the rate (price) fixing proposals of the Reichsbank. Plenge favored legal control rather than private agreements under the aegis of the Reichsbank, replacing gold in circulation with small notes, and above all a less avid search for earning assets by the Reichsbank, which he considered the primary cause of its inadequate gold reserve. In retro­ spect Plenge would appear to have had the better of the argument not only * f 2 *) with von Lumm but also with those like Arnold^ who wrote in his defense. J There Is one aspect of the problem on which, even in retrospect, it is difficult to come to a firm conclusion except somewhat arbitrarily. aspect is the role of foreign funds. One of the difficulties in forming a judgment is the lack of reliable data on the development of — --------------- der Arnold, "Die Barreserven der Kreditbanken und die Inanspruchnahme thp ®ichsbankf' Bank Archiv, Vol. 11, pp. 363-315" Arnold was head of he Mistical Division of the Reichsbank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis rmany's international financial position. It is almost certain^1) ^^Elven this is not certain. One could cite data that were long taken authoritative to prove the reverse. Although these data are now aS .pect so is the method used to correct them! See Enquete-Ausschuss, dpntsche Zahlungs'bilanz, pp. 130-133, and Der Bankkredit, pp. 80-8l, that over-all Germany was a net creditor, that she was a large net credi­ tor on long-term, and a net debtor on short-term. In individual years, she was apparently a net debtor. The Reichsbank and Plenge disagreed on the question of foreign funds. Unfortunately - again in retrospect - the case of neither is really convincing. The case advanced by the Reichsbank contains incon­ sistencies, both internal and in relation to its program as a whole. Director von Lumm, for example, objected both that German banks paid "too high" rates for short-term foreign funds and that, by borrowing short funds abroad to take advantage of the higher rates in Germany, they widened the spread between bank rate and market rates and thus defeated the purposes of the Reichsbank. He also objected both that the banks came to the Reichsbank in such large measure to meet the quarterly drains and that they borrowed abroad to meet it - without indicating that he understood that these might be alternative sources of funds. There were other inconsistencies. Nevertheless, von Lumm did emphasize the dangers of short-term foreign indebtedness, especially to countries that might use threats or actual withdrawals for political purposes. Von Lumm’s discussion was a variation of the argument developed later by Schacht/2^ Schacht, Eigene oder Geborgte Wahrung. Berlin, 1927; PP- p a l m a r Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis h cht said that the German banks could defeat a restrictive policy of h Reichsbank by borrowing abroad. On at least one occasion he seri- sly advanced the opinion that an increase in the Reichsbank rate would lead to so much borrowing abroad that market rates would be reduced. It seems more reasonable to suppose that the net effect of tightening any source of credit that is being used will be to tighten the entire market. In other words, not all of the tightening by the Reichsbank would be dissipated through borrowing abroad. Plenge, the skilled logician, attacked the Reichsbank case on foreign funds with typical scorn. He argued, among other points, that the extent of short-term indebtedness had been exaggerated, that German short-term claims had been underestimated or ignored, and that foreign long-term securities could - and had been - liquidated to cover with­ drawal of short-term funds. But above all, he argued that if the Reichsbank would maintain adequate gold reserves it could meet foreign withdrawals. To help achieve and especially to maintain such reserves in the long run, he felt that the Reichsbank would have to be less avid in seeking discounts, would have to maintain a relatively higher rate. A major weakness in his position is that he did not analyze the effect of such a program on the volume of short-term foreign indebtedness. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The banks agreed that the reserves of the German economy They praised Havenstein for favoring voluntary ^ enlarged. and opposing legislation as a means of achieving the goal; peration b t though they lauded his leadership, they did not follow his recom­ mendations . On January 30* 191^-* Representative Warmuth charged that no progress had been made through voluntary cooperation since the program had been launched in 1908. He therefore proposed that a law be passed to regulate deposit banking.Havenstein emphatically denied Warmuth S.B. , 191^* PP* 6878-6879* Havenstein's reply appears at pp. 6902 6905. charge. As evidences of progress, he mentioned a resolution of the German bankers association which specifically recommended an increase in cash reserves and local agreements among banks to limit competition. But he did admit that there had been no improvement in primary reserves which was the goal of the program. He attributed the lack of objective results to special circumstances. Havenstein took the opportunity to restate his position: "What the Reichsbank considers necessary and wishes to achieve is not a contraction of the credits necessary and desirable for our economy but solely a gradual and careful repression of excesses and exaggerations in the use of deposits and other external funds for excessively long-term or unhealthy purposes." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis this were done, he said that the hanks would he able to increase jf their cash reserves and thereby strengthen the whole credit structure at the same time, reduce their demands on the Reichsbank,« I$y oxxij holding their larger reserves as deposits at the Reichsbank - which the "bankers associations also favored - the Reichsbank, in turn, would he able to increase its gold holdings0 Apparently Havenstein had not been impressed by the analysis 0f Plenge and still held a “productive credit” theory of central hanking in the belief that if each credit was ’"proper" the total volume would take care of itself- He hoped that the banks would strengthen their reserves sufficiently to meet out of their own resources a significant part of any periodic increases in demand for liquidity by the economy* In other words, he wanted a higher average reserve ratio, but expected the ratio to fluctuate more0 Apparently he did not appreciate that this policy would reduce rather than increase the power of the Reichsbank "to regulate the monetary circulation 0 IIIo E„ Impressions of Major Influences on Rate Policy In retrospect, it appears that the Reichsbank was trying to achieve four objectives that were not inherently consistent<> The over­ riding purpose, in case of conflict, was to maintain convertibility<> The management increased its rate to whatever extent it believed neces­ sary to achieve it» A second purpose was to keep rates as low as pos­ sible 0 This purpose conflicted at times with the first« These con­ flicts were resolved by increasing the rates to unusual levels only when compelled to do so by developments in the money market as reflected i*1 high and rising market rates and by reducing bank rate as soon as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • ,, U > m r ket developments permitted, 1, The charts would seem to portray some exceptions« I have a hunch that they arise from the fact that the market rates shown in the charts are monthly averages, whereas bank rate is actual. A short, sharp squeeze in the money market might be reflected clearly in bank rate but not in monthly averages of market rates. I have not as yet had an op­ portunity to analyze daily market rates. A third purpose was to maintain as stable a bank rate as possibleo This purpose explains why bank rate was not adjusted to mar- ket developments below a level that was clear-cut, at least during the first two decadeso The management appears to have had a general judgment as to the minimum rate it could hope to maintain for any considerable period. Only rarely did it reduce its official rate below this point; because it felt that stability of the rate was desirable. During the first decade this ''normal minimum*1 rate was 4 per cent, the lowest rate that had ever been charged by its predecessor, the Prussian State Bank; during the second decade it was 3 per cent; after the middle nineties it was less specific but generally somewhat higher<> When this purpose conflicted with maintenance of convertibility, it was sacrificed» When it seemed to conflict with keeping rates as low as possible - in periods of easy money - it was maintained on the general ground that it would produce lower average rates in the long run even though not always the lowest rate at every moment of time e A fourth purpose was to maintain a large pprtfolio of bills. The ostensible purpose was to enable the management to observe at first hand developments in the money market, although desire for profits should not be ruled out entirely. This purpose, like the second and third, was subject to the. primary objective of maintaining converti­ bility, The management devoted much time and thought to resolving the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis periodic conflict in periods of easy money between maintaining a con­ tinuously large portfolio and maintaining a stable bank rate. The issue was made acute by the large seasonal variations in the demand for cur­ rency* which forced wide variations in either the portfolio, in market rates, or both. The Reichsbank objected to the wide spread that devel­ oped between bank rate and market rates when both were low. It did not, however, withdraw funds from the market in such periods to force market rates up; because, to do so, would have reduced its earning assets. Instead, it adopted a highly flexible preferential rate in the period 1880-1896, tried to secure agreements among the commercial banks that they would not compete so actively through rates, and tried to induce the banks to maintain larger average reserves. None of these efforts, of course, really reconciled the inherent conflict. In establishing its own rate the Reichsbank clearly paid close attention to the market rate on prime bills, apparently on the assumption that this rate measured or reflected accurately the strength of basic economic forces. As one analyzes the composition, general orders of magnitude, and sources of changes in the accounts of the Reichsbank, how­ ever, it seems likely that the market rate varied at times "by accident”, quite apart from "manipulations” attributed at times to the dealers who I* ( 1 ) "established" the rate. As a single illustration: the Reichsbank did XT)---------------------- Plenge, Diskontpolitik, pp. 184 and 3$2, note 6k. not distinguish regularly between reserve balances of banks and other deposits; yet a shift from the former to the latter would tighten the money market and a shift from the latter to the former would ease it. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis [V. Tta-slG Problems of Control Can one integrate this episode in the history of a particular bank into general principles of central banking? descrip­ central The tion, of course, could be inaccuratej one cannot really transpose oneself in time and space. But was the Reichsbank in position to pursue an effec­ tive policy if the description is essentially correct? In forming a judgment on this question, it is important to re­ member that there are numerous ways in which a central bank may influence the supply, availability, and cost of credit. One should not, therefore, judge effectiveness on the basis of a specified procedure. It may be recalled that Keynes came close to exclusiveness when, in his Treatise on Money, he developed the principle that the best measure of a central bank's influence is its ability to establish the volume of member bank reserves at predetermined levels. ~) J. M. Keynes, A Treatise on Money, New York, 1930, Chapters 2, 25, and 32. A few years later, Seymour Harris concluded that ’’Central banks ought to concentrate their attention on the cash balances of member banks; it alone is the variable to be controlled if they have any serious inten­ tion of exercising control over the money market. UJ~~ ----;---------- ->• Harris, Twenty Years of Federal Reserve Policy, Cambridge, 1933? I quoted this statement with approval in a review of Harris* book ln —el^wirtschaftliches Archiv, Vol. ^0, p. 7* This conclusion, though widely held, is based on an overly e-hdniotic view of central banking, deposit creation, and the flow of ixerman monetary developments during the period under survey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis f bp understood in terms of commercial bank reserves. This negative cannon uc inc-inn is based on a number of considerations. conclusion In the first place, the Reichsbank did not publish data on balances either in its weekly statements or annual reports reserve . Information is available only for isolated dates in its memorial volumes, "he reason is that the management did not focus its attention on such balances or try to establish them at predetermined levels. In the second place, the Reichsbank could not have established and maintained reserve balances at a predetermined level quite apart from any question of controlling its own earning assets. It should be recalled that the volume of reserve balances was determined not exclusively by changes in earning assets but by changes in all other accounts at the Reichsbank as well. The major items were cash reserves, other deposits, and notes in circulation. We may use the year 1910 for purposes of analysis because June 15, 1910, is one of the few dates for which we have the necessary information. Reserve balances at M90 million were only a small fraction of the size of other relevant accounts or even of annual variations in some of them. Since these accounts were not subject to control or, in most cases, even to immediate influence by the Reichsbank, it follows that the Reichsbank could not have controlled reserve balances 3-t predetermined levels. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1'ABLE VI Selected Accol ints at the Reichsbanl 3.n 1910 (l) ... (in ml.11ion marks ) Size on Account Maximum Minimum Spread June 15, 1910 ** Notes 2,073 1,379 693 Metallic reserve 1,183 908 275 Deposits 921 495 k-2 6 public* 476 144 332 private* 55^ 326 228 Public 303 Private 260 Banks*** 90 Other financial 53 Other 117 * Including float ** Excluding float *** Joint stock banks irj------------------------ R.B. II, pp. 31, 41, 83, 85-86, 113. In the third place, balances at the Reichsbank were only part of the primary reserves of commercial banks. Again we have only scat­ tered and fragmentary information. The Reichsbank estimated that of M773 million of primary reserves held by commercial banks in 1913, M532 million were in their own vaults and M2^1 million on deposit at banks (2 ) of issue. in other words^ control over reserve balances would not Untersuchung des Bankwesens, Part II, p. 36° Savings banks divided eir million of primary reserves equally between vault cash and ePosits at banks of issue. been synonymous with control over total reserves. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis In the fourth place, German banks did not maintain their rimary reserves at any customary relationship to deposits. Banks were not required to hold minimum reserves against their deposits. The Reichsbank did require minimum balances of all its customers including banks, but the purpose was to compensate it for services rendered in clearing, transferring, and collecting payments. Unfortunately, we do not have as frequent data on the condition of German banks as would be desirable. Prior to the agreement to publish bimonthly statements, we have only the annual year-end statements. It was common knowledge that banks ’’dressed their windows” for the occasion. From the middle 1890's, when the great industrial expansion set in, until the reexamination of policy, discussed in Section III-D, the ratio of the great banks fell by half from about 15 per cent to about 7*5 Per cent. The inquiry pro­ duced no significant improvement; but the decline was halted. Bimonthly reports revealed much lower ratios as well as significant variations in the short run. On February 28, 1911, lor example, the ratio was 3*7 per (1) cent. Banks were not afraid to permit their primary reserves to run "^l"J”~ ”"1( Karl Nordhoff, "Uber die Liquiditatsfrage,** in Untersuchung des Bankwesens. Part I, vol. 2, p. ^91* N.M.C., Statistics for Great Britain, Germany and France, 1867-1909, p* 21^, gives annual consoli­ dated balance sheets for German banks. The ratio for February 28, 1911, is from von Lumm, "Diskontpolitik,” p. 182. so low because they felt comfortable in the conviction that their port­ folio of eligible bills could always be rediscounted at the Reichsbank. Confronted with such a loose-jointed system, one might be tempted to conclude that the Reichsbank had little power to enforce its will. The impediments to an effective policy seem too formidable. But Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -this he premature. The warranted conclusion is that conclusion would volume of reserve balances was only one - and by itself a relatively the one at “ of many connections between Reichsbank policy unimportant and the money market or the flow of expenditures. conditions in It is important not to overestimate the independent power of the German commercial banking system to expand its deposits by reducing its demand for liquidity - its primary reserve ratio. Had an individual hank attempted to expand in this way, it would, of course, have lost re- serves in an amount almost equal to the expansion. Had all commercial hanks moved in step, they would have lost cash through withdrawals. The ratio of deposits to circulation in Germany was approximately two.^ So long as this ratio was maintained, the rate of deposit expansion for the system was only about twice the reduction in reserves, (2) Untersuchung des Bankwesens, Part II, p. 36 for deposits, and p. kj2 for money in circulation. W> If one assumes no change in money in circulation - or a constant volume of reserves - the volume of deposits varies inversely with the reserve ratio and approaches infinity as the ratio approaches zero. If, however, one assumes that the additional money in circulation must be provided out of existing reserves, and deposits are twice money in cir­ culation, the maximum expansion of deposits remains twice the reduction m reserves and this multiple does not Increase as the volume of reserves is reduced. Keynes, it may be recalled, felt that the relatively greater importance of cash in Germany than in England was a real source of strength °f the Reichsbank. He reasoned as follows: The part played by the Central Banks in most of the pre-war European monetary systems, for example in France or In Germany, was widely different from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis that of the bank of England. The importance of bank-notes relatively to cheques was far greater; the resources of the Central Banks relatively to those of the Member Banks were far greater (es­ pecially if we have in mind the resources avail­ able to meet fluctuations in the demand for work­ ing capital); there were no obstacles in the way of increases in the Central Banks' "advances"; and the Member Banks were not tied by law or custom to the maintenance of rigid reserve-ratios. Since the Member Banks were not tied by re- serve-ratios and were not prevented from freely rediscounting with the Central Banks whenever they wanted to expand their resources, the control exercised over them by the Central Bank was very imperfect, the main limitation on credit expan­ sion by the Member Banks being set by their supply of bills eligible for re-discount. This weakness, however, was balanced by the fact that, if Member Banks as a whole were inclined to increase their lending, they would get back as deposits a much smaller proportion of the amount lent, because a much larger proportion of the new loans would be taken out in the shape of bank-notes. Thus the Member Banks, having much less power than in Great Britain to create credit, needed much less control, (l) rn Op. Cit., Vol. II, pp. 233-234. This reasoning, it seems to me, diverts attention from the heart of the problem to an interesting but essentially ancillary aspect of it. The key question is: was the Reichsbank in position to enforce its terms on the money market? In answering this question, it is important to understand the power of the Reichsbank to absorb any liquidity that the banks wished to release. At no time were its earning assets less than several times the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis total primary reserves of the banks even as reported for the annual ■balance sheets.^ ^ The following illustrative data are taken from N.M.C., Statistics, pp. nk-193, 23i. (in million marks) Reichsbank End of Earning Primary reserves year Discounts assets of commercial banks 1888 517 629 156 1893 60^ 760 222 1898 865 1,093 3h2 1903 Qk6 1,002 388 1907 1,105 1,302 55^ The banks were fully aware that the liquidity of their portfolios of eligible bills rested on the willingness of the Reichsbank to discount them - and that to secure cash they would have to pay the rate established by the Reichsbank. The market as a whole was always indebted to the Reichsbank and had to meet its terms to acquire additional reserves or cash. The Reichsbank had branches throughout the Empire at which credit was available not only to commercial banks but to commerce, industry, and agriculture as well. A change in the terms on which the Reichsbank granted credit was quickly felt at many points. Although the administration of discounting was not uniform at the branches (see above, pp. 2^-25), it seems to me that the variations were not a significant link in the control mechanism. Administration of acceptability rules, of course, probably operated to reinforce the policy, being tightened somewhat during expansion and loosened somewhat during contraction. The primary method of changing lts terms, however, was to change its rate of discount. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The Reichsbank saw itself confronted by essentially the same problem both while the economy was experiencing slow, hesitant growth and after this gave way in the middle 1890fs to unprecedented industrial and commercial development. The continuing problem, as the Reichsbank saw it, was excessively liberal extension of credit by other lenders, especially by banks. During the period of easy money discussed in Section III-B, it objected to the full investment policy of the inde­ pendent banks of issue. During the period of prolonged prosperity discussed in III-C, it objected to the rapid growth and the declining reserve ratio of commercial banks. Although emphasis shifted from notes to deposits, the Reichs­ bank viewed its problem as one of competition from other banks of one kind or another. This approach led the Reichsbank to underestimate its own power. In the earlier period, for example, it did not observe that the full investment policy of the independent banks of issue reinforced — rather than reduced — its power to influence monetary developments. In the latter period, it did not observe that the market was continuously indebted to it and had to meet its terms in securing cash. Essentially, the Reichsbank tried to solve its problem by out­ bidding its competitors. In the earlier period it discounted at prefer­ ential rates. It should not be inferred that making credit easy was inappropriate. The important point is that the Reichsbank objected that the independent banks of issue made credit so easy that it could not pursue an effective policy. In other words, it did not favor such low rates and yet it met this problem by introducing preferential rates to acquire more bills and thus ease credit still further. In the later period it said that 1^'s P°licy was being frustrated by the actions of commercial banks which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis at low rates. But it kept its own rate low enough to increase discounted earning assets - without observing that it was thereby contributing to the ease both directly and indirectly by increasing the ability of others to It objected that other banks gradually reduced their reserve expand. ratios; but it followed their lead by allowing reductions in its own. Among the factors that led the Reichsbank to underestimate its power were an inability to appreciate that wide variations in the seasonal demand for currency did not really weaken its power, a belief that somehow it needed a large portfolio to pursue an effective policy, and a sensitivity to criticism that its rate was usually higher than that of the other "great" central banks. The Reichsbank undoubtedly could have prevented the decline in its own reserve ratio by maintaining a somewhat higher discount rate. For the economy as a whole, however, it must be remembered that the Berlin money and capital markets were intimately connected with their counterparts, especial­ ly in London, Paris, and New York. Germany, though a net creditor, was a (1) substantial debtor on short-term. Had the Reichsbank maintained somewhat U ) The distinction is important even though some of the long-term foreign claims could be - and were - liquidated in time of trouble. Some institu­ tions followed a deliberate policy of not borrowing from prospective enemies. For example, in its Annual Report for 1911 the Deutsche Bank stated at p. J: For many years past we have so conducted our business that our short-term indebtedness to foreign countries has been counterbalanced by quick assets and loans abroad. In the critical times of the late summer of last year, our position in this respect was especially strong. For a long time past we have teen particular to abstain from becoming liable for short-term money from France in any form whatsoever." higher discount rates, it is almost certain that Berlin would have borrowed wore in London and Paris. The additional borrowing, however, would have tended to force up rates in those markets also. It is unlikely that all of the pressure exerted by the Reichsbank would have been absorbed. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis My conclusion is that the Reichsbank was in position to pursue an effective monetary policy. Regardless of the reserve requirements that the banks set for themselves at the moment, the Reichsbank was in position to make cash scarcer, as measured by interest rates, than the banks wanted it to be. The banks were never willing to accumulate sufficient cash dur­ ing the earlier months of the year to meet the autumnal and winter drains. They had to go to the Reichsbank and meet its terms. The Reichsbank did not, however, develop an adequate procedure to withdraw funds from the market as they returned from circulation. It had sufficient earning assets to do so; but it diverted its attention from the real nub of monetary con­ trol to the ancillary problem of who should bear the cost. The international political atmosphere, however, leads one to harbor a lingering doubt that a somewhat different policy by the Reichsbank would really have solved Germany's basic problem. In retrospect one might be surprised by the smoothness rather than by the difficulties in meeting 1907 the international monetary crisis of and the successive periods of ten­ sion, as over Morocco and the Balkans. Nevertheless, a large and rising volume of short-term international indebtedness could not have been ignored in a world of mounting international political tensions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank rate FMl/aBk Tl» IVfk pC tU Metallic Notes in Reserve rate Date of Date re ( s M e i r l v l e ion m c a i r r k c s u ) lation ratio (Mo. average) change Rate l i 5. jan. *51 657 68.6 4.29 Jan. 3 6. Feb. 485 631 76.9 2.78 Jan. 19 5. Mar. 499 678 73.6 2.83 Peb. 4 4. Apr. 521 677 77-0 2.78 May 564 659 85.6 2.63 May 18 3.5 June 550 778 70.7 2.81 July 531 691 76.8 2.87 July 11 4. Aug* 540 666 81.1 2.53 Sept. 504 740 68.1 3.01 Oct. 487 733 66.4 3.51 Oct. 25 4.5 Nov. 506 720 70.3 3.19 Dec. 501 7 66 65.4 3.28 igiz Jan. 552 730 75-6 2.74 Jan. 5 Feb. 547 694 78.8 2.22 Mar. 555 723 76.8 2.28 Apr. 558 727 76.8 3.05 May 552 679 81.3 3.26 May 11 5- June 548 755 72.6 3.15 June 16 4. July 546 699 78.1 2.80 Aug. 513 687 7^-7 2.58 Sept. 472 736 64.1 3.83 Sept. 12 5. Oct. 466 705 66.1 4.32 Oct. 3 5-5 Nov. 483 662 73.0 4.21 Nov. 12 5- Dec. 452 716 63.1 3.61 Dec. 3 *•5 i M Jan. 48l 645 74„6 2.94 Jan. 21 Feb. 524 621 84.4 2.31 Mar. 503 645 78.0 2.26 Apr. 494 625 79-0 2.62 May 513 593 86.5 2.84 June 510 673 75-8 2-99 July 511 637 80.2 2.87 Aug. 499 619 80.6 2.59 Aug. 29 5 Sept. 469 671 69.9 3.53 Oct. 455 638 71.3 4.09 Nov. 477 588 81.1 4.22 Dec. 472 664 71.1 3.5^ Dec. 11 4.5 187? Jan. 505 585 86.3 3.17 Jan. 11 4. Feb. 537 569 94.4 2.19 Mar. 546 649 84.1 2.07 Mar. 21 3- Apr. 543 664 81.8 1.94 May 553 655 84.4 1.82 June 546 7^5 73.3 2.20 July 550 684 80.4 2.19 Aug. 5^5 673 81.0 2.02 Aug. 13 4. Sept. Oc t. 503 756 66.5 2.72 Nov. 507 75^ 67.2 2.69 Oct. 11 4.5 Dec. 544 719 75.7 3.91 539 793 68.0 3.32 Dec. 10 4. — 1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank rate Mar'k’p t Metallic Notes in Date reserve circulation Reserve rate Date of Rate (Ml 11 lor marks) ratio (Mo. average) change 1880 Jan. 568 728 78.0 3.09 Feb. 583 727 80.2 2.13 Mar 0 572 786 72.8 2.22 Apr. 576 774 74.4 2.64 May 593 718 82.6 2.69 June 582 8l4 71-5 2.92 July 576 748 77-0 2.60 Aug. 536 724 74.0 2.58 Aug. 18 5^ Sept. 535 786 68.1 2.59 Sept. 4 5-5 Oct 0 539 750 71.9 4.08 Oc t. 6 5- Nov „ 547 714 76.6 3.48 Oct. 18 4.5 Dec. 522 806 64.8 3.44 Nov. 9 4. 1881 Jan. 557 704 79 = 1 3.04 Feb. 587 677 86.7 2.16 Mar. 577 769 75*0 2.27 Apr. 570 76l 74.9 2.63 May 589 724 8.1.4 2.93 June 582 839 69.4 3.05 July 577 740 78.0 3.19 Aug. 557 740 75.3 3.46 Aug. 2 6 5. Sept. 515 839 6l.4 4.62 Oct. 510 791 64.5 5.16 Oct. 5 5.5 Nov. 534 755 70.7 4.76 Nov. 26 5- Dec. 514 859 59-8 4.76 1882 Jan. 534 757 70.5 4.40 Feb. 554 683 81.1 3.83 Feb. 1 6. Mar. 551 768 71.7 3.13 Feb. 18 5- Apr. 558 751 74.3 3.39 Mar. 3 4.5 May 584 715 81.7 3.09 Mar. 10 4. June 570 828 68.8 3.35 July 561 758 74.0 3.56 Aug. 546 738 74o0 3.50 Sept. 513 842 60.9 4.42 Sept. 8 I Oct. 511 8l4 62.8 4.70 Nov. 549 755 72.7 4* 64 Dec. 559 831 67.3 4.67 1883 Jan. 617 733 84.2 3.52 Jan, 4 1 Feb. 634 692 91.6 2.71 Mar, 617 780 79-1 2.77 Apr. 621 751 92.7 2.72 May 644 703 91.6 2.65 June 615 820 75.0 3,21 July 613 741 82.7 3.12 Aug. 601 725 82.9 2.90 Sept. 548 806 68,0 3.15 Oct. 547 789 69.3 3.48 Nov „ 585 747 78.3 3.35 Dec. 559 830 67.3 3.37 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis r End of month Official bank rate r*--- Market Metallic Notes in Reserve rate Date of Rate Date reserve circulation (Million marks) ratio (Mo. average) change 1884 602 718 83.8 2.87 J an o 624 680 91.8 2.27 Feb. Mar. 598 769 77.8 2.64 608 744 81.7 3.94 Apr. 632 698 90.5 2.74 May June 613 819 74.8 2.96 July 612 726 84.3 2.67 Aug. 599 712 84.1 2.53 Sept. 553 825 67.0 2.94 Oct o 544 788 69.0 3.26 Nov. 558 746 74.8 3.41 Dee. 518 854 60.7 3.61 1885 Jan. 553 724 76.4 3.17 Feb. 578 682 84.8 2.53 Mar. 558 773 72.2 3.14 Mar. 10 5- Apr. 566 732 77-3 3.87 Apr. 4 4.5 May 609 683 89.2 2.84 May 11 4. June 597 8l4 73.3 2.83 July 598 727 82.3 2.52 Aug. 591 712 83.0 2.29 Sept. 558 824 67.7 2.77 Oct. 594 775 76.6 2.55 Nov. 624 728 85.7 2.65 Dec . 618 859 71.9 3.07 1886 Jan. 671 732 91.7 2.12 Jan. 22 3.5 Feb. 700 705 99*3 1.6l Feb. 20 3. Mar. 682 823 82.9 1.81 Apr. 687 795 86.4 1-79 May 713 764 93.3 1.74 June 705 910 77-5 2.19 July 735 812 90.5 1.6l Aug. 730 811 90.0 1.71 Sept. 670 947 70.7 1.99 Oct. 652 872 74,8 2.56 Oct. 18 3.5 Nov. 676 845 80.0 2.86 Nov. 29 4. Dec „ 670 1,010 66.3 3.90 Dec. 18 5. 18§X Jan. 720 860 83.7 3.29 Jan. 18 4. Feb. 753 806 93.4 3.01 Mar, 7^3 921 80.7 2.34 Apr. 773 864 89.5 1*93 May 805 811 99.3 2.03 May 11 3. June 803 961 83.6 2.4l July 8i4 849 95.9 1.80 Aug. 810 828 97.8 1.65 Sept. 743 959 77.5 2.29 Oct. 751 912 82.3 2.23 Nov. 791 884 89.5 2.25 Dec. 767 1,011 75-9 2.42 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank ratie Market Metallic Notes in Reserve rate Date of Date reserve » circulation Rate ratio (Mo„ average) change (Million marks) 821 879 93 1.68 857 839 102 1.45 840 964 87 I.85 912 932 97 1.55 989 881 112 1.56 988 1,059 93 1.76 992 948 104 1.41 964 940 102 1.69 882 1,070 82 2.45 Sept. 17 4. 860 1,011 85 3.24 866 972 89 3.15 858 1,093 78 3*51 Dec. 6 4.5 907 952 95 15 Jan. 12 933 898 103 52 Feb. 4 914 1,023 89 76 940 997 94 52 959 956 100 57 911 1,101 82 27 900 1,001 89 1.77 858 992 86 2.16 771 1,151 67 15 Sept, 757 1,057 71 19 Oct. 778 1,000 77-8 70 735 lsl6i 63.3 78 785 998 78.7 .83 822 917 89.6 .46 Feb. 22 803 1,052 76.3 >75 836 997 85.9 .93 870 940 92 06 95 850 l,o84 78 = 4 .72 839 975 86,1 .15 798 976 81.8 ,07 725 1,132 64.0 ,52 Sept. 26 719 1,053 68.3 ‘77 Oct. 11 5.5 764 970 78.8 .14 759 1,103 68.8 08 953 86.9 3.10 Jan. 12 4. 922 94.7 2.60 Feb. 3 3.5 1 „04l 80*3 2.67 Feb. 13 3. 989 88.9 2.68 934 97.6 2.85 May 15 4. 1,066 83,1 3.26 959 95-7 3.32 951 98.8 3.20 1,094 81.9 3.30 1,033 87.3 3.20 995 93.9 3.13 1,123 80.3 2.92 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank rate Market Metallic Notes in Date reserve circulation Reserve rate Date of Rate (Million marks) ratio (Mo, average) change 1822 uT oaUn* * - 960 989 97.1 I.78 Jan. 11 3. Feb. 978 892 109.6 1.57 942 1,026 91.8 1.46 MiWa*r .0 Akry\ri> 0 951 999 95-2 1.50 MWeai vj 998 928 107.5 1.37 June 979 1,088 90.0 1-79 July 983 981 100.2 1.44 Aug • 969 974 99,5 1.44 Sept. 888 1,115 79-6 1.86 Oct. 865 1,076 80.4 2.18 Oct. 28 4. Nov. 872 1,006 86.7 2.33 Dec. 838 1,140 73.5 2.89 1893 Jan. 901 988 91.2 1.77 Jan. 17 3. Feb. 924 928 99-6 1.31 Mar. 869 1,070 81.2 1-75 Apr. 863 1,013 85.2 2.06 May 886 947 93.6 2.83 May 12 4. June 8l4 1,100 74.0 3.14 July 810 990 81.8 3.10 Aug. 804 950 84.6 4.06 Aug. 11 5- Sept. 739 1,101 67.1 4.63 Oc^fc. 773 1,033 74,8 4.51 Nov. 827 962 86.0 4.52 Dec. 798 1,110 71.9 4.40 i§2£ Jan. 880 953 92.3 2.71 Jan. 9 4. Feb. 913 909 100.4 1.67 Feb. 5 3. Mar. 857 1,080 79.4 1.84 Apr. 875 1,006 87.0 1.55 May 935 933 100.2 1.75 June 899 1,109 8l*l 1.73 July 927 998 92.9 1.50 Aug. 954 975 97-8 1,49 Sept. UC 4Z* 0 919 1,126 81.6 1.88 972 1,079 90.1 1.65 w TD\e o a c * v • . 1,074 1,065 100.8 1.50 1,014 1,211 83.7 1.65 Jan. 1,092 1,056 103.4 1.38 Feb. 1,096 984 111.4 1,26 Mar. 1,039 1,157 89.8 1.63 Apr. 1,070 1,096 97-6 1.55 May 1,076 1,060 101.5 1.74 June 1,011 1,228 82.3 2.10 July 1,018 1,093 93.1 1.64 Aug. Jo 3 ae «p\ it». 991 1,074 92.3 1.57 915 1,283 71.3 2,50 UC g . 914 1,192 76,7 2.54 Nov 903 1,149 78.6 2,93 Nov. 11 4. 853 1,320 64.6 3.33 — -— — — _ _ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Official bank rate Market Metallic Notes in rate Date reserve I circulation Reserve Date of Rate (Million marks) ratio (Mo. average) change ^89 6 Jan. 934 1.078 86.6 2.90 Feb. 947 1,011 93.7 2.28 Feb. 12 3. Mar. 880 1,249 70.5 2.09 Apr* 897 1,120 80.1 2.21 May 921 1,040 88.6 2.66 June 872 1,230 70.9 2.74 July 899 1.079 83.3 2.38 Aug. 903 1,045 86.4 2.52 Sept. 816 1.257 64.9 3.41 Sept. 7 4. Oct. 829 1,129 73.4 4.09 Oct. 10 5. Nov. 858 1,065 80.6 4.52 Dec. 805 1.258 64.0 4.67 i§21 Jan. 878 1,050 83.6 3.27 Jan. 19 4. Feb. 916 983 93.2 2.58 Feb. 26 3. Mar. 861 1,201 62.7 2.93 Apr. 884 1,112 79.5 2.48 Apr. 10 3. May 919 1,045 87.9 2.36 June 865 1,221 70.8 2.67 July 863 1,079 80.0 2.38 Aug. 865 1,071 80.8 2.56 Sept. 756 1,287 58.7 3.32 Sept. 6 4. Oct. 800 1,165 68.7 3.88 Oct. 11 5. Nov. 870 1,100 79-1 4.14 Dec. 827 1,320 62.7 4.46 1828 Jan. 913 1,091 83*7 .18 Jan. 20 4. Feb. 963 1,022 94.2 .59 Feb. 18 3. Mar. 883 lf28l 68.9 • 71 Apr. 849 1,162 73.1 .07 Apr. 9 4. May 863 1,078 80.1 .23 June 809 1,266 63.9 .57 July .20 852 1,097 77.7 Aug. 859 1,064 80.7 .21 Sept. 738 1,340 55.1 .64 Oct. 728 1,211 60.1 .02 Oct. 10 Nov. 773 1,138 67.9 .90 Nov. 9 Dec. 752 1,357 55*4 .26 Nov. 19 1822. Jan. 843 1,112 75.8 ■ 4.33 Jan. 17 5. Feb. 887 1,050 84.5 3.78 Feb, 21 4.5 Mar. 828 1,265 65.5 4.28 Apr. 874 1,158 75.5 3.73 May 916 1,104 83.0 3.63 May 9 4. June 834 1,300 64.2 3-95 June 19 4.5 July 835 1,118 74.7 3.75 Aug. 827 1,090 75.9 4.42 Aug. 7 5. Sept. 687 1,383 49.7 4.85 Oct. Nov. 708 1,221 58.0 5.06 Oct. 3 6. 730 1,148 63.6 5.65 Dec. 701 1,359 51.6 5.97 Dec. 19 7. lJV IUnTC Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Market Official bank rate Metallic Notes in Reserve rate Date of Date reserve circulation Rate ratio change (Million marks) (Mo. average) 1222 J . an. 805 1,100 73,2 4.42 Jan, 12 6. Feb. 835 1,031 8l.O 4.21 Jan. 27 5,5 Mar. 744 1,310 56,8 5.21 801 1,165 68.8 4.43 Apr • 845 1,091 77.5 4.56 May June 822 1,310 62.7 4.86 July 860 1,122 76.6 4.06 July 13 5- 848 1,096 77.4 4.03 Aug. Sept. 725 1,344 53-9 4.41 Oct. 767 1,233 62.2 4.03 Nov. 8l4 1,166 69,8 4.16 Dec. 730 1,410 51.8 4.49 1?01 Jan. 856 1,156 7^*0 3.57 Feb. 894 1,057 84.6 3.22 Feb. 26 4.5 Mar. 812 1,321 61.5 3-79 Apr. 913 1,176 77-6 3.38 Apr. 22 4. May 971 1,108 87.6 3.19 June 897 1,375 65.2 3.20 June 18 3.5 July 958 1,230 77.9 2.8l Aug. 931 1,196 77.8 2.26 Sept. 830 1,430 58.0 2.68 Sept. 23 4. Oct. 896 1,284 69.8 2.83 Nov. 921 1,221 75*4 2.84 Dec. 869 1,466 59.3 2.96 m i Jan. 1,008 1,202 83.9 2.11 Jan. 18 3-5 Feb. 1,050 1,116 94.1 1.85 Feb. 11 3. Mar. 95 6 1,349 70.9 1-79 Apr. 1,038 1,247 83.2 1.65 May 1,072 1,182 90-7 I.98 June 991 1,410 70.3 2.17 July 1,021 1,232 82.9 1-59 Aug. 981 1,191 82.4 1.73 Sept. 840 1,^95 56.2 2.14 Oct. 858 1,327 64.7 2.73 Oct. 4 4. Nov. 878 1,248 70.4 3.12 Dec. 786 1,516 51,8 3.38 A222. Jan. 892 1,235 72.2 2.26 Feb. 919 1,166 78.8 1.90 Feb. 11 3*5 Mar. 818 1,450 56.4 2.69 Apr. 875 1,260 69.4 2.62 May 909 1,199 75-8 ■ 3.09 June 884 1,435 61.6 ' 3.29 June 8 4. July 926 1,216 76.2 2.96 Aug. 934 1,197 78.0 3.30 Sept. 858 1,516 56,6 3.68 Oct. 866 1,360 63.7 3.32 Nov. 899 1,278 70.3 3.46 Dec. 793 1.565 50.7 3.54 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank rate Marke t Metallic | Notes in reserve 1 circulation Reserve rate Date of Rate (Million marks) ratio (Mo. average) change 913 1,240 73.6 2.58 937 1,182 79.3 2.77 828 1,497 55-3 3.44 910 1,314 69.3 2.83 965 1,210 79-8 3.10 870 1,478 58.9 2.98 926 1,270 72.9 2.60 925 1,251 73.9 2.62 793 1,599 49.6 3.09 902 1,379 65.4 3.69 Oct. 11 5- 1,000 1,294 77 “3 3.99 927 1,600 57.9 3.94 1,069 1,284 83,3 2,56 Jan. 10 4. 1,096 1,211 90,5 1*93 Peb. 14 3-5 1,016 1,544 65.8 2.22 Peb. 25 3. 1,054 1,349 78.1 1.92 1,073 1,273 84.3 2.30 951 1,555 61.2 2.34 961 1,320 72.8 2.12 932 1,308 71.3 2.23 732 1,683 43.5 2.99 Sept. 11 4. 794 1,442 55.1 4.01 Oct. 3 5. 843 1,330 63.4 4.62 Nov. 4 5.5 80 4 1,657 48.5 4.99 Dec. 11 ' 6. 954 1,324 72.1 3.81 Jan. 18 5. 970 1,250 77-6 3.35 889 1,629 54.6 4.02 974 1,396 69.8 3 .44 1,012 1,323 76.5 3.39 May 23 4.5 844 1,648 51.2 3.68 912 1,377 66.2 3.49 B78 1,360 64.6 3.43 675 1,704 39»6 4.23 Sept. 18 5. 737 1,485 49.6 4.83 Oct. 10 6. 766 1,396 54.9 5.27 665 1,776 37.4 5.58 Dec. 18 7. 843 1,412 59.7 4.90 Jan. 22 6. 890 1,340 66.4 4.68 776 1,731 44.8 5-40 898 1,510 59.5 4.65 Apr. 23 5-5 953 1,419 67.2 4.44 831 1,729 48.1 4.66 878 1,478 53-4 4.44 861 1,453 59-3 4.62 737 1.825 40.4 5.08 750 1,617 46.4 4.91 Oct. 29 6.5 679 1,511 44.9 6.61 Nov. 8 7.5 . 704 1,886 37-3 7-07 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATISTICAL APPENDIX REICHSBANK RATE AND RELATED FACTORS (continued) i End of month Official bank rate r"--------— Market Metallic Notes in Reserve rate Date of Date reserve circulation ratio (Mo. average) change Rate (Million marks) —— 1308 Jan. 886 1,484 59-7 4.98 Jan. 13 6.5 Feb. 918 1,411 65.I 4.48 Jan. 25 6. Mar. 871 1,782 48.9 4.49 Mar. 7 5.5 Apr. 947 1,542 61.4 4.11 Apr. 27 5- May 1,006 1,456 69.1 3.91 June 1,032 1,795 57*6 3.33 June 4 4.5 July 1,097 1,519 72.2 2.76 June 18 4. Aug. 1,127 1,494 75.4 2.82 Sept. 1,034 1,897 54.5 3.14 Oct. 1,064 1,674 63.6 2.79 Nov. 1,087 1,547 70.3 2.54 Dec. 980 1,975 49,6 2.92 122! Jan. 1,096 1,512 72.5 2.24 Feb. 1,091 1,4l8 76.9 2.17 Feb. 16 3.5 Mar. 1,013 1,853 54.7 2.66 Apr. 1,059 1,623 65.2 1.98 May 1,063 1,508 70.5 2.32 June 1,029 1,886 54.6 2.91 July 1,067 1,597 66.8 2.28 Aug. 1,0 64 1,565 68.0 2.13 Sept. 910 2,023 45.0 3.06 Sept. 20 4. Oct. 925 1,736 53.3 3.83 Oct. 11 5- Nov. 982 1,599 61.4 4.47 Dec. 915 2,072 44.2 4.34 1310 Jan. 1,060 1,579 67.1 3.09 Jan. 2 4.5 Feb. 1,082 1,480 73.1 2.94 Feb. 10 4. Mar. 1,041 1,916 54.3 3.52 Apr. 1,089 1,667 65.3 3.14 May 1,140 1,536 74.2 3.19 June 1,027 1,924 53.4 3.23 July 1,059 1,617 65.5 3.03 Aug. 1,047 1,578 66.3 3.33 Sept. 908 2,056 44.2 3.85 Sept. 26 5, Oct. 947 1,751 54.1 4.15 Nov. 1,014 1,599 63.4 4.50 Dec. 924 2,073 44.6 4.53 m i Jan. 1,107 1,573 70.4 3.50 Feb. 1,139 1,486 7 6.6 3.07 Feb. 6 4.5 Mar. 1,059 1,974 53.6 3.34 Feb. 18 4. Apr. 1,135 1,659 68,4 2.96 May 1,178 1,558 75.6 2,84 June 1,121 1,965 57*0 3.38 July 1,,.. 1,178 1,647 71.5 2.46 Aug. 1,170 1,640 71-3 3.03 Sept. 995 2,295 43.4 4.16 Sept. 19 5- Oct. 1,053 1,915 55*0 4.32 Nov. 1,106 1,755 63.0 4.51 Dec. 1,008 2,251 44.8 4.86 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis End of month Official bank rate Market Metallic Notes in Reserve rate Date of reserve circulation Rate Date ratio (Mo. average) change (Million marks) 1?12 1,185 1,720 68.9 3.33 J • pgb . 1,223 1,608 76.1 3.79 Mpjsal T i * • 1,152 2,099 54.9 4.72 Aor. 1,240 1,786 69.4 3.75 May 1,251 1,657 75-5 3.91 June 1,228 2 *008 58.8 4.14 June 11 4.5 July 1,271 1,743 72.9 3.36 Aug • 1,240 1,753 70.7 3.93 Sept. 1,145 2,274 50.4 4.38 Oct. 1,132 1,993 56.8 4.19 Oct. 24 5- Nov. 1,065 2 ,010 53.0 5.23 Nov. 14 6. Dec. 1,037 2,519 41.2 5.94 1^13 Jan. 1,170 1,962 59.6 4.68 Feb. 1,192 1,876 63.5 5.15 Mar. 1,207 2,325 51-9 5-90 Apr. 1,252 2,051 6l.O 4.56 May 1,318 1,913 68.9 5-31 June 1,363 2,317 58.8 5.53 July 1,418 1,949 72.8 4.65 Aug. 1,401 1,916 73.1 4.88 Sept. 1,408 2,456 57.3 5-35 Oct. 1,462 2,119 69.0 4.71 Oct. 27 5-5 Nov. 1,503 1,982 75-8 4.45 Dec. 1,447 2,593 55.8 4.57 Dec. 12 5. 1214 Jam. 1,575 2,053 76.7 3.11 Jan. 22 4.5 Feb. 1,611 1,954 82.4 3.06 Feb. 5 . 4. Mar. 1,579 2,428 65.0 3.37 Apr. 1,657 2 ,101 78.9 2.38 May 1,635 2,014 81.2 2.60 June 1,631 2 M l 67.8 2.86 July 1,528 2,909 52.5 2.48 Sources: Metallic Reserves: 1876-1910, Memorial Volume: Die Reichsbank, 1876-1910, pp. 26-51 1911-1914, Memorial Volume: Die Reichsbank, 1901-1925, P- 16 otes in Circulation: 1876—1887s Verwaltungsberlchte der Reichsbank 1888-1907, National Monetary Commission Statistics for Great Britain, Germany and Prance, 1867-1909, pp. 174-193 ib u 1908-191^, Verwaltungsberichte der Reichsbank r et Rates: 1876-1910, Memorial Volume: Die Reichsbank, 1876-1910, pp. 206-207 1910-1914, Statlstische Jahrbflcher fflr das Offi Deutsche Reich c al Bank Rates: 1876-1907, National Monetary Commission Statistics for Great Britain, Germany and France, 1867-1909 > P- 200 1908-1914, Memorial Volume: Die Reichsbank, 1901-1925, PP- 90-91 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1952, December 31). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19530101_karl_r_bopp

@misc{wtfs_regional_speeche_19530101_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1952},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19530101_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}