The Reichsbank is a private institution but is much more closely under the control of the Government than are the Bank of England and the Bank of France. It acts as the fiscal agent of the Government in receiving and disbursing public money without pay, and it is authorized to perform like service for the states of the empire. The Government shares in the profits which are distributed as follows: first, a dividend of 3 1/2 per cent (originally 4 1/2 per cent) goes to the stockholders; second, 20 per cent of the remainder is placed to the reserve fund until it is equal to one-fourth of the capital; third, the balance is divided equally between the Government and the stockholders until the latter receives 8 per cent; fourth, of the surplus remaining the shareholders receive one-fourth and the Government three-fourths.
When the Reichsbank was founded in 1875, it was given a monopoly of note issues in the future without direct limitation upon the amount. There were at the time thirty-two other banks and the bank act provided that whenever they surrendered the note issue privilege their circulation might be added to that of the Imperial Bank. Only five of these banks of issue now remain with a total circulation of less than 69,000,000 marks while the note "contingent" (authorized tax-free note issue) of the Reichsbank has gradually been increased to 550,000,000 marks, with an aggregate circulation of 618,000,000 marks.1 The notes of the bank are not legal tender, but they circulate freely throughout the empire. They must be redeemed in gold on presentation at any of the branches, as well as at the head office in Berlin. The other banks are required to redeem their notes at an agency in Berlin or Frankfort as well as at their own counters. They must accept each other's notes but cannot pay them out except to the bank issuing them or in the city where such bank is located. In this way their circulation is narrowly limited.
The Reichsbank is required to keep a "cash" reserve equal to one-third of its circulation consisting of imperial notes, coin and bullion. Note circulation in excess of the cash reserve must be covered by commercial paper with at least two names and maturing within ninety days. This reserve, however, is not held as a special redemption fund for the notes; it protects depositors equally with the note holders. The Reichsbank holds a large part of the reserves of the other banks and so usually keeps in coin and bullion two or three times the proportion to circulation required by law.
1 At certain periods in the year this aggregate circulation is raised to 818,771,000 marks. - The Reichsbank (Nat. Mon. Comm.), p. 39.
Another striking feature of the German system, which gives it much greater elasticity than either the English or our national bank system, is the provision that the banks may in emergencies issue notes in excess of the cash reserve by paying a tax at the rate of 5 per cent a year on such excess. This elastic clause has several times proved advantageous in relieving money stringency.
The Reichsbank is the custodian, as it were, of the gold supply of the country and it employs the same method as the Bank of England to protect and regulate its specie reserve, that is, raising or lowering its discount rate as need arises. It has an advantage over the Bank of England, however, in that the law requires the other banks to conform to its rate when it is 4 per cent or more and not to cut the rate more than one-fourth of 1 per cent when it is less than 4 per cent.
There are many independent banks in Germany some of which, notably the Deutsche Bank, the Disconto-Gesell-schaft, and the Dresdner Bank, are very powerful. They play an important part in promoting industrial enterprises both at home and abroad, make advances on real estate mortgages and on corporate securities, and do a trust company business. Agricultural credit is provided by the Raiffeisen and the Landschaften banks of Germany, which make both long and short time loans to farmers and other borrowers.
The use of the check is not as highly developed in Germany as in the United States and England. Bank notes are largely used, and as the 100 mark (nearly $25) note is the lowest denomination gold and silver coins are widely used in smaller payments. A partial substitute for the check is found in the "giro" or transfer system employed by the German banks, notably the Reichsbank and its branches. Under this system two patrons of the same bank instead of paying cash to each other have a transfer made on the books of the bank, the sum involved being deducted from the account of the payer and added to the account of the payee. The transfer system has been greatly strengthened in recent years by the spread of clearing systems between banks. The bill of exchange also plays an important role in the German mechanism of credit. It operates somewhat as follows: A dealer sells goods to a merchant and receives in payment a bill of exchange payable in three or six months. The dealer uses this bill in making payment to the manufacturer to whom he is indebted, and so on until some holder has it discounted or accepted at his bank. Business men are in the habit of taking these bills of exchange as they would cash, so that before they finally reach the bank they usually effect a series of credit transfers.
Most of the other European countries have national or central banking systems whose general features resemble in a broad way those already described. Generally the central bank has a monopoly of note issues, has many branches, and is under the control of the government for which it acts as fiscal agent. The Bank of Russia is owned and controlled directly by the Government, which supplies its entire capital.