The monopoly of note issue in Germany is conferred by law upon the Reichsbank and four other joint-stock banks; in case of the surrender of the note-issuing power by any of the four the privilege accrues to the Reichsbank. By the Law of 1909 the maximum limit of the uncovered issue was fixed at 550,000,000 marks, with the provision that for the last week of each fiscal quarter, when the volume of payments runs high, the limit is 750,000,000. The uncovered issue is based upon commercial paper in the Reichsbank's portfolio; during the war, indeed, treasury certificates of indebtedness were declared to be eligible cover. No limit is set for the total issue of bank notes, but any amount in excess of the legal limit of the covered issue must be secured by an equal amount of cash, and any excess not so secured by cash is subject to a tax of 5 per cent per annum. During the war the Darlehnkassenscheine (a special form of currency issued by loan societies upon the security of bonds, stocks, and so forth) were declared by law to be "cash" and eligible cover for bank notes. Of course, the pyramiding of notes made possible by these provisions promoted inflation of the German currency.

The 5 per cent "elastic limit" device, which is a less awkward method of permitting emergency issue than the English system of suspending the Bank Act, has been resorted to quite frequently. The frequency of its use has, in fact, been the occasion of fixing a higher amount for the uncovered issue. In practice the Reichsbank has not been influenced greatly by the 5 per cent tax; it has often paid the tax, loaned the notes at 3 or 4 per cent, and borne the loss, when financial exigencies or public responsibilities seemed to warrant. Under present practices, therefore, there are no great reasons for retaining the tax, since the volume of notes depends rather upon the will of the bank administrators than upon money rates. In former times the tax probably served a useful function as a danger signal.

The cash in the vaults of the note-issuing German banks consists of gold and silver coins, gold bullion, imperial treasury notes, Darlehnkassenscheine, and notes of other banks. The law requires that the cash held exclusive of the notes of other banks be equal in any case to at least one-third of the total circulation, and that notes not covered by cash be covered by discounted commercial paper having not more than three months to run until maturity and bearing three indorsements or not less than two names of well-known solvency. Neither the cash nor the commercial paper is specifically pledged, however, against the notes, for both remain in the general fund and portfolio of the issuing bank; nor are the noteholders given any special lien on these assets. The system simply means that the assets on which the issue of notes is based consist of cash and very liquid commercial paper.

The issue of notes for gold is purely a matter of convenience to the holder; it helps to provide a large gold reserve but no elasticity is achieved. The issue of notes for rediscounted paper, however, within the limit of the uncovered issue, provides an elastic note system, and the device of the 5 per cent elastic limit allows for emergency issues. The Reichsbank before the war carried a large reserve of gold and silver. The government required the issuing bank to keep its notes strictly convertible, redeeming them over its counter. The four issuing banks, other than the Reichsbank, were required to maintain redemption offices at Berlin and Frankfort; the Reichsbank redeems its notes also at its branches. The bank notes are a lawful tender to any other bank of issue and must be received at par, and notes thus received must be presented for redemption or be used in payments to the issuing bank or in the issuing bank's home city. Since 1909 the Reichsbank notes have been a full legal tender.

Altogether the issue of bank notes in Germany has been a very important side of banking, for deposit banking has until recently developed but little.