By Philip Scranton
"The measures taken in Germany to reconstruct the banking system of the country are without precedent in economic history," intoned an Economist writer in late February 1932.
The magazine's Berlin correspondent said the operations under way to save the country's financial system involved "a further penetration by the State into the sphere of banking."
Although many Americans had chafed at the Federal Reserve’s creation in 1913 (and some still do), American banking practice differed sharply from Germany’s. In the U.S., thousands of stand-alone banks served local needs. In Germany, a few huge banks performed multiple financial functions, using branches scattered across the Reich. In the 1920s, the German state already controlled about 40 percent of bank assets, owning outright one of the five biggest companies and holding shares in all the others, as the economist Germa Bel has noted. Such government ownership was inconceivable in the U.S.
German banks, unable to cope with reparations demands and massive conversions of Reichsmarks to gold, collapsed in late 1931, threatening both the financial system and the state. The Berlin stock market had faltered in1928. It soon became clear that banks hadn't revalued their book assets downward; selling them now meant serious losses. In this context, gold withdrawals triggered a panic.
"Capital from abroad was unobtainable," the Economist wrote, "at home, capital and confidence had disappeared." The only plausible solution was nationalization.
Chancellor Heinrich Bruening’s austerity administration, politically stalemated by the parliament, had begun governing by presidential fiat. In a December 1931 decree, Bruening assumed "control of the whole economic machinery of the country" and "reprieved Germany from imminent collapse," the Economist wrote.
The state called on all German banks to write down assets and publish balance sheets reflecting current valuations. This led to reductions in capital of 60 percent to 80 percent, the erasure of reserves, and the forced merger of two great banks, Danat and Dresdner. Hjalmar Schacht, the president of Germany’s central bank, organized $150 million in write-offs, most of which the government absorbed.
As the New York Times reported: "The new bank will be almost exclusively owned by the Reich." Shareholders’ equity was largely wiped out, although depositors and many creditors were protected.
"A definite nationalization of almost the entire amount of big German banking business" had been undertaken, the Wall Street Journal reported. In March, the paper added: "the Reich now controls more than half the capital invested in banking and this nation of 60 million people possesses only three big deposit banks, all of which are more or less dependent on government."
Meanwhile, America’s banking miseries gathered momentum.
(Philip Scranton is a Board of Governors professor of the History of Industry and Technology at the University of Rutgers at Camden and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog. The opinions expressed are his own.)
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-0- Feb/27/2012 23:33 GMT