Prior to the unification of the German Empire in 1871 each state had its own hanking system, and most of the hanks were allowed to issue notes according to certain restrictions and upon such bases as the states and cities establishing them should prescribe. These banks differed materially as to the limit of their authorized issues, and were bound to a great variety of restrictions as to their requirements of a reserve. Under this state of affairs notes were current only in the state where they were issued, and trade was seriously hampered for want of a stable and uniform currency. The coinage law of 1871 undertook to establish a uniform monetary system throughout the empire, and paved the way for the adoption of the gold standard in 1873. In 1874 a law was passed abolishing the different issues of paper money then current throughout the different states of the empire and substituting therefor imperial bank notes convertible into gold. The new currency was distributed to the states to the extent of 180,000,000 marks. Finally, in 1875, all banks of issue throughout the empire were brought under a uniform law, and made a part of the system of imperial finance, thereby greatly improving and facilitating trade and commerce.

Under this system the Bank of Prussia became the Imperial Bank of the empire, with a near approach to a monopoly of the note issuing power and the same system for the gradual abolition of the issues of other banks and the final concentration of the power of issuing circulating notes in the Imperial Bank as is German Banking before the Empire possessed by the Bank of England. The capital of the Imperial Bank (Reichsbank) is 120,000,000 marks, divided into shares of 3,000 marks each, and is all owned by private individuals. Unlike the Bank of England, the Reichsbank is subject to governmental control. Its affairs are managed by a president and board of directors named by the government, subject to the chancellor of the empire, or a substitute named by him who has entire charge of the bank, and directs its policy. The stockholders of the bank have no voice whatever in its management. They merely furnish the capital and divide the profits of the institution. As a matter of fact, however, the stockholders do not receive all of the profits. In case the net profits exceed 3 1/2 per cent., then the government becomes a sharer in the profits above that limit.

The German system of note issues rests upon a mixed basis of securities and specie, somewhat similar to that of England, with the important difference that the law contents itself with requiring the maintenance of this basis, without specially pledging or setting apart specific coin or securities for the purpose, as is done by the Issue Department of the Bank of England. German currency is secured by the salutary power of the law rather than by specific property, and to make sure of the observance of the law, all banks of issue are required to report the condition of their note issues every week to the chancellor of the empire. No precise limit is fixed for the aggregate circulation of the notes of the Reichsbank and other banks of issue, but the total of notes which can be issued without being covered by cash in the vaults of the banks is 385,000,000 marks, of which 250,000,000 marks are allowed to the Reichsbank and 135,000,000 marks are apportioned among the other banks. For all notes issued by any bank beyond its limit, the government requires that cash shall be held to the full amount of such issue, the term "cash" here meaning German and foreign gold, bullion, imperial treasury notes and the notes of other banks. But if any bank issues notes beyond the limit and not covered by cash a government tax of 5 per cent is imposed, thus taking away the profit, and hence the inducement to such extra issue. In case the weekly report of any bank shows that its issue exceeds the limit as above explained, a tax of 5/48 per cent is charged, this being the rate for one week at 5 per cent per annum. The law requires in any case, however, that the cash held, exclusive of the notes of other banks, must equal not less than one-third of the total note circulation, and that the remainder shall be protected by good assets, usually consisting of securities or discounted paper having not more than three months to run and bearing two solvent names. The note issues of Germany thus rest upon a mixed basis of specie and other assets.

As previously stated, the legal limit of note issue without specie reserve may be exceeded upon payment of the government tax of 5 per cent. This is an important feature of the German system, since it gives an elasticity to the currency of the empire. In a time of stringency, the rate of discount goes above 5 per cent., and then the banks can make an issue beyond the limit, loan the funds at the ruling rate of discount and have a profit left after paying the government tax of 5 per cent. But the moment the money market loosens and the rate of discount falls below 5 per cent the banks can no longer afford to loan out funds at a rate which is lower than the tax which they must pay to the government, and hence the extra circulation is retired. By this system the volume of the circulating medium adjusts itself to the needs of the country. This automatic contraction and expansion has been of great benefit to the commercial interests of Germany. In this way financial stringencies have several times been relieved and probable panics averted.

The currency of Germany is kept on a gold basis by the Imperial Bank, which is required to redeem its notes on demand.

Elasticity of the Currency