by Somary
[Front Matter and Preface]: The front matter and preface for the 1930 edition of Felix Somary's 'Bankpolitik'. Somary explains that while the first edition appeared at the start of WWI, he waited until the post-inflation period to revise the work to provide a lasting picture of the international banking situation and development trends for bank managers and economists. [Table of Contents]: A detailed table of contents covering the definition of banks, the money market (including credit types like bill of exchange and securities credit), central bank policy (discount policy, gold reserves), the structure of leading international money markets (London, Berlin, Paris, New York), and the capital market (mortgages, emissions, stock exchanges). [The Concept of a Bank]: Somary critiques existing definitions of banking, such as the English focus on money creation or the common view of banks as credit mediators. He argues that the essence of a bank is not its active side (lending) but its passive side: the professional taking of credit. He defines banks as institutes whose purpose is to take credit, emphasizing their sensitivity to public trust. [Classification of Banks]: Banks are classified based on the nature and duration of their liabilities. Somary distinguishes between central banks (issuing notes), deposit banks (short-term liabilities), financial banks (working with associated companies' funds), insurance companies (long-term predictable payouts), and mortgage institutes (long-term contractual capital). [Equity Capital in Banking: Central Banks]: Somary analyzes the role of equity capital (Eigenkapital) in banking, starting with central banks. He argues that for established central banks, equity is largely unnecessary for trust or operations, as their monopoly and note-issuing power suffice. He notes the historical trend of central bank equity becoming a diminishing percentage of total liabilities and critiques proposals for capital increases. [Equity Capital in Deposit and Mortgage Banks]: The author examines equity's role in deposit banks, where it serves to build trust and cover losses. He observes a global trend of declining equity-to-liability ratios due to banking concentration and the professionalization of management. He also discusses the specific equity requirements for savings banks, credit cooperatives (Schulze-Delitzsch/Raiffeisen), and mortgage institutes, noting legal limits on bond issuance relative to capital. [Bank Liabilities and Deposit Types]: Somary categorizes bank liabilities (other than equity) into six groups: cash reserves for check/transfer traffic, consumption-related deposits, investment-related deposits, consortium business proceeds, savings deposits, and deposits created through the bank's own credit granting. He highlights differences between English and Continental practices regarding interest on deposits and the accounting of unused credit lines. [The Relationship Between Passive and Active Business]: Somary analyzes the fundamental principle that active bank transactions must correspond to passive ones, noting that this is uniquely challenging for deposit and central banks due to the uncertainty of withdrawal timing. He distinguishes between 'own liquidity' (short-term call loans) and 'derived liquidity' (rediscountable bills), explaining how the burden of liquidity often shifts to the central bank. The section concludes by defining the money market as the intersection of supply and demand for these liquid credits. [The Money Market: Bank Credits and Commodity Financing (Reimbursement Credit)]: This section introduces the money market, dividing its credits into operating and securities credits. It provides a detailed case study of the 'Remburskredit' (reimbursement credit) using the example of Australian wool trade, explaining how bank acceptances and shipping documents secure international transactions. Somary discusses the historical dominance of London and the rise of New York and Amsterdam as central hubs for these low-risk, highly organized credit forms. [Operating Credit During Production: Current Account and Acceptance Credit]: Somary examines operating credits during the production phase, focusing on current account (Kontokorrent) and acceptance credits. He argues that the limit of such credit should be the realization value of a firm's liquid assets in case of bankruptcy, emphasizing that raw materials are safer collateral than finished goods. He critiques the rise of acceptance credits (which Spiethoff called the 'banknote of private banks'), noting they increase bank risk by obscuring the underlying transaction and increasing market sensitivity. [The Discount Credit and the Decline of the Commercial Bill]: Somary discusses the 'Warenwechsel' (commercial bill) as a preferred form of operating credit due to its mobilizability and legal strength. However, he provides statistical evidence (citing English banks like Lloyds and Midland) showing a significant decline in the use of bills relative to deposits since 1880. He attributes this to changing payment customs, the rise of cartels, and the growth of department stores, while also warning that the expansion of installment credit (Abzahlungskredit) is a dangerous crisis symptom. [Effects of Operating Credit and the Nature of Securities Credit]: This segment explores how operating credit provides elasticity to production but can also exacerbate price swings during business cycles. It then transitions to 'Effektenkredite' (securities credits), including Lombard and Report credits. Somary emphasizes that marketability is more important than financial foundation for these credits, using turnover data from the New York Stock Exchange to show how concentration in a few leading stocks (like Steel or Radio) affects liquidity and bank risk. [The Role of Securities Credit and Money Market Dynamics]: Somary details the functions of securities credit, such as enabling professional speculation and providing elasticity to the capital market by discounting future savings. He analyzes the sources of supply and demand on the money market, noting how industrial concentration reduces credit demand while state funds and international balances (like Russian or Japanese holdings) provide supply. He concludes by describing the 'open market' as the most elastic area of the money market, where the central bank serves as the ultimate support. [The Determination of Money Market Interest Rates]: Somary analyzes the factors determining money market interest rates from the perspectives of both borrowers and lenders. For industrial borrowers, the upper limit is generally the expected profit from a business operation, though exceptions exist for maintaining production or competing with outsiders. For securities credit, a distinction is made between investors, who rarely pay interest exceeding the asset's yield, and speculators, whose willingness to pay is limited only by their expectations of price increases, explaining why call money rates can skyrocket during panics. [Credit Banks as Lenders and the Hierarchy of Interest Rates]: This section examines how credit banks determine interest rates based on their costs, profit requirements, and liquidity needs. Somary details a hierarchy of interest rates ranging from the private rate for first-class bills to the higher rates for non-eligible bills and current account credits. He explains the seasonal fluctuations of call money and the role of the central bank's discount rate as a ceiling for the open market, while also providing a statistical breakdown of bank costs based on US National Bank data from 1918-1926. [The Open Money Market and the New York Call Market]: Somary describes the 'open money market' as a reservoir for bank liquidity, focusing on the unique role of the New York call money market. He explains how the call rate acts as a sensitive indicator of the economic cycle, often showing greater volatility than the official bank rate. The expansion of New York as an international financial center is highlighted, noting the massive fluctuations in broker loans between 1919 and 1929. [The Position of Credit Banks: Profit, Liquidity, and Payment Systems]: This section explores the dual requirements of profit and liquidity for credit banks. Somary provides a detailed history and analysis of the development of cashless payment systems (checks and giro transfers) in England, the US, and the European continent. He argues that despite advanced clearing systems, currency (cash) remains essential for wages and small daily transactions, creating two distinct circulation spheres: bank transfers and physical currency. [Bank Liquidity and the Theory of Deposit Creation]: Somary critiques the theory that banks 'create' deposits out of nothing through credit expansion. While acknowledging the views of Davenport, Keynes, and Schumpeter, he argues that individual banks are strictly limited by their clearing balances and that expansion is a systemic process dependent on central bank reserves. He emphasizes that the velocity and intensity of deposit use are more significant than the mere quantity of deposits, and discusses the necessity of central bank access for maintaining liquidity during panics. [The Role of Central Banks in the Money Market]: Somary defines the central bank's role as the protector of the national currency and the ultimate source of liquidity. He explains why central banks do not pay interest on deposits and how their ability to issue notes allows them to expand credit rapidly to meet demand. He warns that while central banks can support the economy, they also carry the risk of inflation if they do not maintain international value stability. He concludes that sustained inflation is impossible without the complicity or leadership of the central bank. [The Redemption Obligation of the Central Bank]: Somary analyzes the central bank's obligation to redeem notes for gold, distinguishing between domestic circulation needs and international payment requirements. He argues that while domestic gold demand can lead to liquidity crises during panics, states typically suspend redemption obligations in such times. He also details how international gold transfers are relatively small compared to total transaction volumes but are essential for settling balances. [Historical Development of Note Emission Limits]: This section traces the history of the Bank of England's note emission policies, from early liquidity rules to the 1810 Bullion Report and the 1844 Peel's Bank Act. It discusses the conflict between the 'Currency Principle' and the 'Banking Principle,' highlighting how the 1844 Act established rigid metal backing requirements for notes above a certain threshold, effectively centralizing note issuance and removing it from the bank's discretion. [The Emergence and Critique of Discount Policy]: Somary describes the evolution of discount policy as a tool for managing liquidity and gold flows, noting its increased frequency of use after 1844. He provides a critical evaluation of the 'classical' view of discount rates, arguing that their effectiveness in suppressing prices or attracting foreign capital depends heavily on a country's specific economic position (creditor vs. debtor) and the nature of its industrial credit needs. [Principles of Discount Determination and Seasonal Effects]: The text examines the shift from a reactive 'Konstatierungstheorie' (merely reflecting current status) to a proactive discount policy that anticipates seasonal and cyclical demands. Somary explains the 'autumnal drain'—the increased demand for currency and gold in the fall due to harvests and international trade—and how central banks must manage these predictable pressures to maintain stability. [Economic Epochs and Central Bank Performance]: Somary compares two major economic epochs: the period of falling prices (1873–1895) and the period of rising prices (1895–1914). He uses comparative statistics of the Reichsbank, Bank of England, and Bank of France to show how rising price trends increase the demand for central bank credit and strain gold reserves, concluding that 1930 likely marks a turning point back toward a deflationary era similar to the late 19th century. [Interest Rate Stabilization Tendencies and Implementation]: Somary traces the historical shift in central bank philosophy from the rigid, automatic interest rate adjustments of the 19th century (Peel's Act) to a modern preference for stable discount rates. He contrasts the early British view, which prioritized gold flows regardless of social cost, with later teleological approaches that sought to protect domestic industry from international speculative shocks. The segment includes comparative tables of discount rate changes for major central banks between 1858 and 1929, demonstrating a clear trend toward fewer and less volatile rate adjustments. [Means for Securing Stable Discount Rates: Temporal Equalization]: This section examines the mechanisms used to maintain stable interest rates by managing the balance of payments. Somary distinguishes between measures that provide temporal equalization (bridging gaps between favorable and unfavorable payment periods) and those that influence the underlying economic transactions. He highlights the role of international credit, bank acceptances, and the shift from simple commodity bills to sophisticated financial instruments in smoothing seasonal fluctuations in national payment balances. [Foreign Exchange Policy (Devisenpolitik) and International Clearing]: Somary provides a historical overview of foreign exchange policy (Devisenpolitik) as a tool for stabilizing interest rates, tracing its origins from 18th-century Scotland to the Indian Council bills and the practices of the Belgian and Austro-Hungarian central banks. He argues that while foreign exchange reserves can smooth monthly fluctuations, they are insufficient for long-term structural deficits or major crises. The text also touches upon the emergence of the gold exchange standard and the early role of the Bank for International Settlements (BIS) as a potential clearing center. [Influencing Transactions Affecting the Balance of Payments]: The final section of this chunk discusses direct interventions intended to influence the balance of payments, such as restricting arbitrage and implementing gold premium policies (notably by the Bank of France). Somary critiques these 'mercantilist' remnants, noting that they can discredit a currency internationally. He also addresses the control of foreign loans and the dangers of short-term foreign capital inflows, which can trigger artificial booms followed by dangerous contractions when the credit is withdrawn. [The Restriction of Gold Claims and the Transfer of Cash Management to Banks]: Somary discusses how the transfer of cash management and payment services to banks reduces the demand for physical circulation money. He compares the development of cashless payment methods in England, the United States, Germany, and Switzerland, noting that these systems save gold and banknotes. However, he warns that during times of crisis or loss of confidence, a sudden demand for hoarding can overwhelm credit banks, necessitating central bank intervention through note issuance. [The Centralization of Gold Reserves]: This section examines the centralization of gold reserves within central banks versus physical gold circulation. Somary analyzes David Ricardo's proposal for a gold bullion standard and the historical shift from gold coins to banknotes in major economies. He weighs the economic benefits of centralization (efficiency, international creditworthiness) against political risks (vulnerability during war, potential for state-driven inflation). He concludes that while centralization is now standard, political instability may still justify private gold reserves to prevent total economic collapse. [The Relationship Between Credit Banks and Central Banks]: Somary explores the evolving power dynamics between central banks and commercial credit banks. As credit banks grew in size, the central bank's monopoly over the money market weakened. The segment details the technical differences in interest rate formation (monopoly vs. competition) and the challenges central banks face in maintaining market control during periods of high liquidity. It discusses 'open market policy' and other instruments used to align private rates with official policy, noting the varying success of these measures in England, Germany, and the US. [The Scope of Discount Policy in the Modern Era]: The final section of this chunk compares the effectiveness of discount policy across different national systems. In England, discount policy remains the primary tool due to a lack of other interventionist mechanisms. In contrast, Central and Eastern European states rely on a mix of foreign exchange controls and state-aligned banking. Somary critiques the French and American systems, noting that while they possess massive gold reserves, their central banks' actual influence on the domestic economy varies significantly due to structural differences in their financial markets. [The Determination of the Bank Rate]: Somary examines the shift from automatic discount rate adjustments based on gold status to discretionary bank policy. He argues that modern central banks set rates based on 'liquidity policy'—estimating the maximum potential credit demand during peak economic cycles and seasonal lows to ensure they remain within legal emission limits. He provides a comparative analysis of the Reichsbank, Bank of England, and Bank of France, noting that legal frameworks and domestic market structures (like the role of brokers in London) dictate different rate-setting behaviors despite similar gold coverage ratios. [Price Stabilization and International Cooperation]: This section critiques the emerging theories of using discount rates for price stabilization, specifically discussing the ideas of Knut Wicksell and Alfred Marshall. Somary highlights the practical difficulties of such a policy, including the lack of reliable indices and the necessity for international coordination to prevent capital flight. He explores the potential and limits of international central bank cooperation, concluding that while a global monopoly bank could theoretically stabilize prices, national interests and the need for liquidity in times of crisis make true international solidarity unlikely in the near future. [Central Banks in Times of Crisis and War]: Somary analyzes the critical role of central banks as the ultimate source of liquidity during economic panics and wars. He contrasts the 'continental' model of direct market involvement with the Bank of England's detached approach, arguing that the latter allows for more aggressive credit contraction to protect gold reserves. He discusses the psychological impact of legal emission limits, the necessity of suspending these limits during wars, and the modern challenges of 'capital flight' and inflation awareness, which limit the effectiveness of traditional inflationary war financing. [Constitution and Economic Position of Central Banks]: Somary examines the constitutional structure and economic role of central banks, noting the global dominance of the monopoly system. He discusses the historical evolution of bank charters, specifically the Bank of England's transition from short-term privileges to indefinite status. The segment contrasts private central banks with state-owned institutions, arguing that private structures offer better protection against political interference and currency devaluation during crises, while emphasizing the necessity of central bank independence from government fiscal needs. [Governance, Interest Rates, and State Relations]: This section analyzes the governance of central banks and their relationship with state treasuries. Somary critiques the influence of commercial banks and industrial interest groups on central bank boards, arguing that the debtor should not govern the creditor. He explores the 'Einheitssatz' (uniform interest rate) versus regional rates, and discusses how the integration of state treasury management (as seen in England's Exchequer-Bank relationship) vs. the US Independent Treasury system impacts market liquidity and stability. [The Structure of Leading Money Markets: London]: Somary provides a detailed analysis of the London money market, describing it as an organic, historically grown entity rather than a rationally designed one. He highlights the unique role of discount brokers as intermediaries between deposit banks and international credit needs. The segment explains how London's market structure allows for high liquidity and international trade financing (rembours), but also notes the lack of centralized organization and the delayed 'alarm signals' provided by the Bank of England during crises. [The Money Markets of Berlin and Paris]: A comparison of the Berlin and Paris money markets. Berlin is characterized as a strictly organized, national market focused on industrial operating credits through bank acceptances, dominated by a few large credit banks. Paris is described as a highly liquid market where the Bank of France acts as a central cooperative-style institution, though it lacks a deeply developed acceptance market for international trade compared to London. [The New York Money Market and the Federal Reserve Reform]: Somary analyzes the transformation of the New York money market following the 1913 Federal Reserve Act. He explains how the lack of a central bank previously forced reserves into the call money market (stock exchange loans), creating volatility. While the reform aimed to develop a commercial acceptance market and decentralize reserves, Somary argues it largely failed to diminish New York's dominance, instead leading to a massive expansion of the call money market and a unique system of daily 'renewal rates' for stock exchange credit. [International Interaction Between Money Markets]: This section challenges the notion of a perfectly integrated global money market. Somary argues that while technology allows for rapid transfers, significant barriers remain, including national trust, lack of knowledge of foreign institutions, and regulatory constraints on insurance and savings banks. He discusses the 'Finanzwechsel' (finance bill) as a dangerous tool for international inflation and explains how capital flows are driven by interest differentials, seasonal cycles, and fears of inflation. [The Capital Market: Nature and Investment Types]: Somary defines the capital market as the market for investment capital, distinguishing it sharply from the money market based on the purpose and 'binding' of funds rather than just duration. He critiques theorists like Moulton and Hahn who blur these lines. The core argument is that capital market investments involve long-term claims on capital goods or debt, carrying inherent entrepreneurial risk and lacking the immediate 'fungibility' or liquidity of money market instruments, except in the case of organized securities markets. [The Activity of Banks in the Capital Market]: Somary analyzes the role of various financial institutions on the capital market, noting that while banks gained leading positions in Continental Europe before the war, their organizational structure is not naturally suited for long-term investment. He distinguishes between mortgage banks and insurance companies, which are suited for long-term assets, and credit banks, which manage volatile deposits. The text categorizes bank activities into mortgage credit, construction credit, industrial investment credit, and securities commission business, while noting that direct long-term industrial ownership by banks has largely been abandoned in favor of temporary consortium-based holdings. [The Classification of Bank Capital Market Activities]: This section continues the classification of bank activities, focusing on industrial investment credit provided by credit banks and securities commission business. Somary discusses the risks associated with banks holding government bonds (renten), arguing that despite their perceived liquidity, large-scale bond holdings are unsuitable for credit banks due to the risk of price drops during rapid liquidation and the higher cost of central bank access compared to bills of exchange. [Mortgage Credit and the Functioning of Mortgage Banks]: A detailed examination of mortgage credit, which Somary identifies as the most long-term form of credit. He describes the mechanics of mortgage banks (Pfandbriefinstitute), where liquidity concerns are secondary because the maturity of the bonds (Pfandbriefe) matches the maturity of the loans. The text explores the competition between private mortgage banks, savings banks, and insurance companies, the risks of over-lending ('Schornsteinhypotheken'), and the organizational necessity of local knowledge for rural lending, which often gives local savings banks an advantage over centralized urban institutions like the Crédit Foncier. [The Economics of Mortgage Interest and Market Dynamics]: Somary analyzes the determinants of mortgage interest rates, comparing the cost structures of mortgage banks, insurance companies, and savings banks. He explains how mortgage credit expands the demand for real estate by making small savings investable and by providing credit that is cheaper than private equity. The section also addresses the inherent dangers of second mortgages, which are often avoided by banks due to high risk, and the shift from long-term amortization mortgages to shorter fixed-term mortgages in the pre-war period. [Construction Credit (Baukredit)]: Somary defines construction credit as a hybrid between money market and capital market credit. It is short-term in contract but intended for long-term investment. He highlights the specific risks, such as the lender's potential need to complete a building if the developer fails, and the dependence on the eventual procurement of a long-term mortgage. He notes that the construction market is often the first to stall during a boom and the first to recover when capital becomes fluid. [Investment Credit (Anlagekredit) and Industrial Financing]: This extensive section defines investment credit (Anlagekredit) as credit exceeding a company's liquid assets, effectively making the bank a partner in entrepreneurial risk. Somary contrasts this with money market credit, noting that investment credit is repaid from profits rather than production cycles and is difficult to mobilize. He critiques Schumpeter's view on credit creation for 'new combinations,' arguing that banks using short-term deposits cannot safely finance unproven innovations. He emphasizes that banks must not become permanent owners of industrial enterprises and should ideally limit investment credit to the amount of the company's own equity. [Bank Equity and the Non-Organized Capital Market]: Somary discusses how banks procure equity capital for enterprises, noting the shift from the long-term holding model of the Rothschilds to the commission-based model of the Crédit Mobilier. He then explores the 'non-organized capital market'—investments in land, factories, and private companies that lack a standardized exchange. He argues that these markets are characterized by a lack of profit equalization due to local limitations, personal traditions, and the need for specialized industry knowledge, making them generally unsuitable for standard bank operations. [The Securities Market and its Characteristics]: Somary outlines the fundamental differences between the unorganized capital market and the organized securities market. He emphasizes how the division of investment capital into small units allows for organized market formation, enabling investors to diversify their portfolios and delegate control, which effectively separates the roles of entrepreneur and capital owner. [Supply and Demand on the Securities Market]: This section analyzes the components of demand and supply in the securities market. Demand is driven by public entities, mortgage banks, and industrial enterprises, while supply is determined by national income levels not used for consumption or directed toward the money market. Somary notes that the degree of capital market development varies by country based on local entrepreneurial habits and the prevalence of private vs. public investment. [Interest Rates and Profitability]: Somary defines the relationship between capital market interest (fixed-income) and profitability (equities). He discusses the upper limits of interest rates for public bodies, mortgage institutes, and industry. He critiques the theories of Hilferding and Lexis regarding the capitalization of entrepreneurial profit during the conversion of private firms into joint-stock companies, arguing that profitability and interest rates often move in opposite directions during the business cycle. [Interaction Between Money and Securities Markets]: Somary explores the deep connection between the money market and the securities market, referencing classical and modern theorists like Adam Smith, von Wieser, and Böhm-Bawerk. He explains how capital flows between these markets depending on the phase of the business cycle (depression vs. boom) and the spread between interest rates and equity profitability, using the 1929 New York crash as a primary example of extreme tension between these rates. [International Capital Market Relations and Policy]: This section examines the international movement of capital and the political implications of foreign lending. Somary discusses how nations (especially France) have used capital exports as a tool of foreign policy, but warns of the risks: the long-term nature of loans often outlasts political alliances, and the concentration of risk in specific debtor nations can isolate capital markets during crises. He also notes the friction between protectionist trade policies and liberal capital export policies. [The Role of Banks in the Organized Capital Market]: Somary contrasts the English banking system with Continental and American models, focusing on the latter's deep involvement in the securities market. He details the functions of banks in financing, consortium formation (underwriting), and the issuance of securities. He provides practical insights into how banks evaluate industrial enterprises for conversion into joint-stock companies, emphasizing the need for conservative capitalization based on minimum historical earnings rather than peak boom results. [The Functions of the Stock Exchange in the Capital Market]: Somary analyzes the organizational and economic functions of the stock exchange (Börse) as a localized securities market. He discusses how the exchange facilitates rapid transactions, creates average profitability rates, and allows banks to estimate issuance prices with precision. The text contrasts the historical 'wild' speculation of the 18th and 19th centuries with the more 'bourgeois' and regulated modern exchange, while addressing common criticisms regarding the exchange's role in economic crises and the ruin of small investors, which he largely attributes to bank credit policies rather than the exchange itself. [Characteristics of Exchange-Traded Securities and the Shift to Bank Placement]: This section details the specific requirements for securities to be successful on the exchange: large volume, fluctuating yields, and a reflection of general economic trends. Somary notes a shift toward 'bank placement' (Bankenplacement), where banks and state institutions like postal savings banks (Postsparkassen) bypass the exchange to place securities directly with customers. This decentralized approach is presented as a response to the exchange's intermittent nature and the public's need for steady wealth management rather than speculative volatility. [The Tasks and Methods of Bank Placement]: Somary explores how banks manage the placement of new securities through personal customer relationships and decentralized branch networks. He discusses the role of investment trusts and the creation of various security types (bonds, preferred shares, common shares) to suit different risk profiles. A significant portion is dedicated to the 'stabilization of dividends' by major continental banks (e.g., Deutsche Bank, Crédit Lyonnais), where hidden reserves are used to maintain steady payouts regardless of actual annual profit, effectively turning industrial stocks into fixed-income-like instruments for the public. [The Relationship Between Bank Placement and the Stock Exchange]: Somary examines the tension and synergy between bank-led placement and the open stock exchange. He warns against the total displacement of the exchange by banks, noting that without an independent exchange, price transparency vanishes and banks become 'parties' in their own advice, potentially leading to conflicts of interest. The text contrasts the German/Continental system (bank-dominated) with the English system (exchange-dominated) and the American system (a hybrid evolving toward the Continental model), highlighting the risks of bank-driven market manipulation and the loss of public judgment. [Bank Effectiveness and Cyclical Policy in the Capital Market]: The final section of this chunk discusses the broader impact of banks on the capital market and their necessary cyclical (Konjunktur) policies. Somary argues that banks must maintain liquidity at the peak of an economic boom to remain effective when the economy needs capital most. He criticizes laws that force savings banks to buy government bonds regardless of interest rate cycles, which led to massive losses during inflation. He concludes that the 'German system' of integrated investment banking requires immense responsibility, as bank leaders' errors can have systemic consequences for both their customers and the national economy. [The Structure of Capital Markets: The United States]: This section analyzes the structure and evolution of the American capital market, centered in New York. Somary describes its transition from a national debtor market to an international creditor market, noting the high degree of organization and the significant role of 'brokers loans' and investment trusts. He highlights the speculative nature of the US market compared to Europe, the shift from bonds to common shares, and the increasing influence of large industrial corporations that manage their own capital needs, often bypassing traditional bank control. The text also notes the historical lack of branch banking and the impact of the Federal Reserve's reserve requirements on market liquidity. [Industrial Influence and Bank Relations in the US Market]: Somary examines the power dynamics between US banks and industry, arguing that large industrial and railway companies exert more influence on the market than banks due to their massive cash reserves and independent dividend policies. He contrasts this with the European model, noting that US banks lack a branch system and deep insight into industrial operations. The section also discusses the extreme volatility of the New York market, using General Electric as an example, and how this attracts global capital, often at the expense of European market liquidity. [The London Capital Market]: The author discusses the decline of London's pre-war dominance as the world's primary international capital market. He attributes this to the loss of American securities during the war, high taxation, and the shift of European financing to New York and Paris. While London remains significant for domestic issues and rationalization efforts, Somary notes a rigid separation between banking and industrial speculation. He observes that the Bank of England has begun to intervene more directly in industrial financing as a 'notstand' (emergency) measure, though commercial banks remain hesitant to follow suit. [The Paris and Berlin Capital Markets]: This segment compares the French and German capital markets. Paris is described as a strong potential creditor market with a high savings rate, currently recovering from post-war inflation. In contrast, Berlin has been transformed from a creditor to a debtor market. Somary details the erosion of German bank capital due to inflation, the loss of foreign assets (like the Baghdad Railway), and the resulting dependence on foreign (especially American) capital. He notes that the influence of German banks over industry has significantly diminished compared to the pre-war era. [The Organization of Banks: Centralization vs. Decentralization]: Somary categorizes banks based on how they collect and use deposits: local/decentralized (savings banks), decentralized collection with centralized use (insurance, post office savings), and fully decentralized (commercial and central banks). He analyzes the merits of the branch system ('Filialsystem'), noting that it is essential for capital-rich nations to reach individual savers. He contrasts the 'suction' branches of France and England, which funnel money to the center, with the more autonomous German branches that require skilled local directors to manage complex industrial credits. [References on American Banking]: Bibliographic note referencing key reports and hearings regarding the American banking system and its concentration tendencies. [The Concentration of Credit Banks]: Somary analyzes the international trend toward bank concentration, providing statistical overviews for England, Germany, the United States, Canada, and France. He argues that large institutions possess structural advantages in check processing, deposit collection, and securities placement, leading to the gradual displacement of smaller private bankers who lack the capital and organizational reach to compete with the 'Big Five' or major Berlin banks. [Central Banks and the Concentration Process]: This section explores the relationship between central bank existence and the concentration of credit banks. Somary disputes the American democratic thesis that central banks promote concentration, arguing instead that they provide a liquidity safety net that allows smaller banks to operate more elastically. He also discusses the emergence of bank cartels and the 'money trust' phenomenon, noting that while concentration increases systemic stability, it risks neglecting local interests and creating bureaucratic rigidity. [Legislative Interventions and State Bank Policy]: Somary reviews legislative attempts to curb bank concentration, such as the Clayton Act in the US and merger restrictions in England and Denmark. He transitions into a broader discussion of state bank policy, noting that while savings and mortgage banks are heavily regulated due to social concerns, credit and finance banks have historically remained independent. However, he predicts increasing state involvement as large banks become 'too big to fail,' effectively gaining a moral state guarantee. [The Economic Significance of Banks]: A deep theoretical analysis of the bank's role in the national economy, focusing on their influence over monetary value and business cycles. Somary argues that banks are 'instruments' (like pianos) whose effect depends on the 'player' (the speculative entrepreneur). He discusses the shift in power from banks to industry and the limitations of central bank power in maintaining stability without controlling the entire deposit and securities market. He concludes that the primary task of bank policy is preventing the misuse of the bank's inherent 'expropriation power' for specific interest groups. [Appendix A: International Comparison of Central Bank Legislation (Part I)]: An international comparative appendix detailing the founding dates, concessions, shareholder rights, and state relations of major central banks, including the Reichsbank, Bank of England, Banque de France, Banca d'Italia, and the Federal Reserve. It covers the legal frameworks governing bank leadership, capital requirements, and the institutional mechanisms designed to ensure independence from the state. [Annahme fremder Gelder (Acceptance of Foreign Funds)]: A comparative overview of how various central banks handle the acceptance of foreign funds and deposits, noting restrictions on interest-bearing accounts for institutions like the Federal Reserve and the Swiss National Bank. [Wechselkredit (Bill of Exchange Credit)]: Detailed regulations regarding the discounting of commercial and agricultural bills of exchange across major central banks, including maturity limits and signature requirements. [Lombardkredit und sonstige Kredite (Lombard and Other Credits)]: Provisions for Lombard loans and other credit forms, detailing the types of collateral accepted (securities, bills, mortgages) and specific limits for banks in Sweden, Denmark, and Austria. [Effektenkauf, Beteiligungen, und Diskontbestimmungen (Securities, Participations, and Discounting)]: Covers the purchase of public securities, bank participations (including the Bank for International Settlements), and the formal procedures for setting discount rates, with a focus on the Federal Reserve Board's oversight. [Notendeckung (Note Coverage and Reserves)]: A comprehensive list of legal reserve requirements for banknotes and deposits in various countries, specifying the ratios of gold, foreign exchange, and commercial paper required to back the currency. [Devisen und Gewinnverteilung (Foreign Exchange and Profit Distribution)]: Regulations regarding foreign exchange operations and the statutory distribution of central bank profits between shareholders, reserve funds, and the state treasury across multiple European and American systems. [Other Services to the State and Introduction to Post-War Banking Literature]: This segment concludes the legal overview of central bank obligations to the state, specifically for the UK, France, Switzerland, and Czechoslovakia. It then transitions into 'Appendix B', a comprehensive bibliographic essay on post-war banking literature. Somary distinguishes between purely technical/legal literature and bank-political analysis, critiquing the shift toward purely monetary theory that ignores the specific institutional nature of banks. He reviews key works by English and American authors such as Lavington, Hawtrey, Moulton, and Watkins, noting the lack of systematic German works since the stabilization. [Literature on Active/Passive Business and Central Bank Policy]: A review of specialized literature concerning the active and passive operations of commercial banks and the evolution of central bank policy. Somary highlights American technical analyses of discount and current account business (Phillips, Westerfield, Willis) and the lack of equivalent European descriptions. He discusses the history of the Bank of England's discount policy, the influence of the Ricardo school, and the emergence of the Federal Reserve System in the US, citing works by Kisch, Elkin, Warburg, and Burgess. He also notes the verifiability of central bank independence and the impact of seasonal fluctuations. [Money Market Theory, Capital Markets, and International Capital Movements]: This section covers the theory of the money market, the relationship between interest rates and stock speculation, and the velocity of bank deposits. It reviews literature on the structure of money markets in London, Berlin, and New York, as well as the specialized field of investment trusts. Significant attention is given to international capital movements, the political background of capital migration (imperialism), and the specific literature on German foreign loans and agricultural credit systems in the post-stabilization era. [Index (Register)]: A comprehensive alphabetical index (Register) for the entire volume, covering key terms, institutions, geographic locations, and individuals discussed in the text. It serves as a navigational tool for topics ranging from 'Abrechnungsverkehr' (clearing) to 'Zwangskurs' (forced exchange).
The front matter and preface for the 1930 edition of Felix Somary's 'Bankpolitik'. Somary explains that while the first edition appeared at the start of WWI, he waited until the post-inflation period to revise the work to provide a lasting picture of the international banking situation and development trends for bank managers and economists.
Read full textA detailed table of contents covering the definition of banks, the money market (including credit types like bill of exchange and securities credit), central bank policy (discount policy, gold reserves), the structure of leading international money markets (London, Berlin, Paris, New York), and the capital market (mortgages, emissions, stock exchanges).
Read full textSomary critiques existing definitions of banking, such as the English focus on money creation or the common view of banks as credit mediators. He argues that the essence of a bank is not its active side (lending) but its passive side: the professional taking of credit. He defines banks as institutes whose purpose is to take credit, emphasizing their sensitivity to public trust.
Read full textBanks are classified based on the nature and duration of their liabilities. Somary distinguishes between central banks (issuing notes), deposit banks (short-term liabilities), financial banks (working with associated companies' funds), insurance companies (long-term predictable payouts), and mortgage institutes (long-term contractual capital).
Read full textSomary analyzes the role of equity capital (Eigenkapital) in banking, starting with central banks. He argues that for established central banks, equity is largely unnecessary for trust or operations, as their monopoly and note-issuing power suffice. He notes the historical trend of central bank equity becoming a diminishing percentage of total liabilities and critiques proposals for capital increases.
Read full textThe author examines equity's role in deposit banks, where it serves to build trust and cover losses. He observes a global trend of declining equity-to-liability ratios due to banking concentration and the professionalization of management. He also discusses the specific equity requirements for savings banks, credit cooperatives (Schulze-Delitzsch/Raiffeisen), and mortgage institutes, noting legal limits on bond issuance relative to capital.
Read full textSomary categorizes bank liabilities (other than equity) into six groups: cash reserves for check/transfer traffic, consumption-related deposits, investment-related deposits, consortium business proceeds, savings deposits, and deposits created through the bank's own credit granting. He highlights differences between English and Continental practices regarding interest on deposits and the accounting of unused credit lines.
Read full textSomary analyzes the fundamental principle that active bank transactions must correspond to passive ones, noting that this is uniquely challenging for deposit and central banks due to the uncertainty of withdrawal timing. He distinguishes between 'own liquidity' (short-term call loans) and 'derived liquidity' (rediscountable bills), explaining how the burden of liquidity often shifts to the central bank. The section concludes by defining the money market as the intersection of supply and demand for these liquid credits.
Read full textThis section introduces the money market, dividing its credits into operating and securities credits. It provides a detailed case study of the 'Remburskredit' (reimbursement credit) using the example of Australian wool trade, explaining how bank acceptances and shipping documents secure international transactions. Somary discusses the historical dominance of London and the rise of New York and Amsterdam as central hubs for these low-risk, highly organized credit forms.
Read full textSomary examines operating credits during the production phase, focusing on current account (Kontokorrent) and acceptance credits. He argues that the limit of such credit should be the realization value of a firm's liquid assets in case of bankruptcy, emphasizing that raw materials are safer collateral than finished goods. He critiques the rise of acceptance credits (which Spiethoff called the 'banknote of private banks'), noting they increase bank risk by obscuring the underlying transaction and increasing market sensitivity.
Read full textSomary discusses the 'Warenwechsel' (commercial bill) as a preferred form of operating credit due to its mobilizability and legal strength. However, he provides statistical evidence (citing English banks like Lloyds and Midland) showing a significant decline in the use of bills relative to deposits since 1880. He attributes this to changing payment customs, the rise of cartels, and the growth of department stores, while also warning that the expansion of installment credit (Abzahlungskredit) is a dangerous crisis symptom.
Read full textThis segment explores how operating credit provides elasticity to production but can also exacerbate price swings during business cycles. It then transitions to 'Effektenkredite' (securities credits), including Lombard and Report credits. Somary emphasizes that marketability is more important than financial foundation for these credits, using turnover data from the New York Stock Exchange to show how concentration in a few leading stocks (like Steel or Radio) affects liquidity and bank risk.
Read full textSomary details the functions of securities credit, such as enabling professional speculation and providing elasticity to the capital market by discounting future savings. He analyzes the sources of supply and demand on the money market, noting how industrial concentration reduces credit demand while state funds and international balances (like Russian or Japanese holdings) provide supply. He concludes by describing the 'open market' as the most elastic area of the money market, where the central bank serves as the ultimate support.
Read full textSomary analyzes the factors determining money market interest rates from the perspectives of both borrowers and lenders. For industrial borrowers, the upper limit is generally the expected profit from a business operation, though exceptions exist for maintaining production or competing with outsiders. For securities credit, a distinction is made between investors, who rarely pay interest exceeding the asset's yield, and speculators, whose willingness to pay is limited only by their expectations of price increases, explaining why call money rates can skyrocket during panics.
Read full textThis section examines how credit banks determine interest rates based on their costs, profit requirements, and liquidity needs. Somary details a hierarchy of interest rates ranging from the private rate for first-class bills to the higher rates for non-eligible bills and current account credits. He explains the seasonal fluctuations of call money and the role of the central bank's discount rate as a ceiling for the open market, while also providing a statistical breakdown of bank costs based on US National Bank data from 1918-1926.
Read full textSomary describes the 'open money market' as a reservoir for bank liquidity, focusing on the unique role of the New York call money market. He explains how the call rate acts as a sensitive indicator of the economic cycle, often showing greater volatility than the official bank rate. The expansion of New York as an international financial center is highlighted, noting the massive fluctuations in broker loans between 1919 and 1929.
Read full textThis section explores the dual requirements of profit and liquidity for credit banks. Somary provides a detailed history and analysis of the development of cashless payment systems (checks and giro transfers) in England, the US, and the European continent. He argues that despite advanced clearing systems, currency (cash) remains essential for wages and small daily transactions, creating two distinct circulation spheres: bank transfers and physical currency.
Read full textSomary critiques the theory that banks 'create' deposits out of nothing through credit expansion. While acknowledging the views of Davenport, Keynes, and Schumpeter, he argues that individual banks are strictly limited by their clearing balances and that expansion is a systemic process dependent on central bank reserves. He emphasizes that the velocity and intensity of deposit use are more significant than the mere quantity of deposits, and discusses the necessity of central bank access for maintaining liquidity during panics.
Read full textSomary defines the central bank's role as the protector of the national currency and the ultimate source of liquidity. He explains why central banks do not pay interest on deposits and how their ability to issue notes allows them to expand credit rapidly to meet demand. He warns that while central banks can support the economy, they also carry the risk of inflation if they do not maintain international value stability. He concludes that sustained inflation is impossible without the complicity or leadership of the central bank.
Read full textSomary analyzes the central bank's obligation to redeem notes for gold, distinguishing between domestic circulation needs and international payment requirements. He argues that while domestic gold demand can lead to liquidity crises during panics, states typically suspend redemption obligations in such times. He also details how international gold transfers are relatively small compared to total transaction volumes but are essential for settling balances.
Read full textThis section traces the history of the Bank of England's note emission policies, from early liquidity rules to the 1810 Bullion Report and the 1844 Peel's Bank Act. It discusses the conflict between the 'Currency Principle' and the 'Banking Principle,' highlighting how the 1844 Act established rigid metal backing requirements for notes above a certain threshold, effectively centralizing note issuance and removing it from the bank's discretion.
Read full textSomary describes the evolution of discount policy as a tool for managing liquidity and gold flows, noting its increased frequency of use after 1844. He provides a critical evaluation of the 'classical' view of discount rates, arguing that their effectiveness in suppressing prices or attracting foreign capital depends heavily on a country's specific economic position (creditor vs. debtor) and the nature of its industrial credit needs.
Read full textThe text examines the shift from a reactive 'Konstatierungstheorie' (merely reflecting current status) to a proactive discount policy that anticipates seasonal and cyclical demands. Somary explains the 'autumnal drain'—the increased demand for currency and gold in the fall due to harvests and international trade—and how central banks must manage these predictable pressures to maintain stability.
Read full textSomary compares two major economic epochs: the period of falling prices (1873–1895) and the period of rising prices (1895–1914). He uses comparative statistics of the Reichsbank, Bank of England, and Bank of France to show how rising price trends increase the demand for central bank credit and strain gold reserves, concluding that 1930 likely marks a turning point back toward a deflationary era similar to the late 19th century.
Read full textSomary traces the historical shift in central bank philosophy from the rigid, automatic interest rate adjustments of the 19th century (Peel's Act) to a modern preference for stable discount rates. He contrasts the early British view, which prioritized gold flows regardless of social cost, with later teleological approaches that sought to protect domestic industry from international speculative shocks. The segment includes comparative tables of discount rate changes for major central banks between 1858 and 1929, demonstrating a clear trend toward fewer and less volatile rate adjustments.
Read full textThis section examines the mechanisms used to maintain stable interest rates by managing the balance of payments. Somary distinguishes between measures that provide temporal equalization (bridging gaps between favorable and unfavorable payment periods) and those that influence the underlying economic transactions. He highlights the role of international credit, bank acceptances, and the shift from simple commodity bills to sophisticated financial instruments in smoothing seasonal fluctuations in national payment balances.
Read full textSomary provides a historical overview of foreign exchange policy (Devisenpolitik) as a tool for stabilizing interest rates, tracing its origins from 18th-century Scotland to the Indian Council bills and the practices of the Belgian and Austro-Hungarian central banks. He argues that while foreign exchange reserves can smooth monthly fluctuations, they are insufficient for long-term structural deficits or major crises. The text also touches upon the emergence of the gold exchange standard and the early role of the Bank for International Settlements (BIS) as a potential clearing center.
Read full textThe final section of this chunk discusses direct interventions intended to influence the balance of payments, such as restricting arbitrage and implementing gold premium policies (notably by the Bank of France). Somary critiques these 'mercantilist' remnants, noting that they can discredit a currency internationally. He also addresses the control of foreign loans and the dangers of short-term foreign capital inflows, which can trigger artificial booms followed by dangerous contractions when the credit is withdrawn.
Read full textSomary discusses how the transfer of cash management and payment services to banks reduces the demand for physical circulation money. He compares the development of cashless payment methods in England, the United States, Germany, and Switzerland, noting that these systems save gold and banknotes. However, he warns that during times of crisis or loss of confidence, a sudden demand for hoarding can overwhelm credit banks, necessitating central bank intervention through note issuance.
Read full textThis section examines the centralization of gold reserves within central banks versus physical gold circulation. Somary analyzes David Ricardo's proposal for a gold bullion standard and the historical shift from gold coins to banknotes in major economies. He weighs the economic benefits of centralization (efficiency, international creditworthiness) against political risks (vulnerability during war, potential for state-driven inflation). He concludes that while centralization is now standard, political instability may still justify private gold reserves to prevent total economic collapse.
Read full textSomary explores the evolving power dynamics between central banks and commercial credit banks. As credit banks grew in size, the central bank's monopoly over the money market weakened. The segment details the technical differences in interest rate formation (monopoly vs. competition) and the challenges central banks face in maintaining market control during periods of high liquidity. It discusses 'open market policy' and other instruments used to align private rates with official policy, noting the varying success of these measures in England, Germany, and the US.
Read full textThe final section of this chunk compares the effectiveness of discount policy across different national systems. In England, discount policy remains the primary tool due to a lack of other interventionist mechanisms. In contrast, Central and Eastern European states rely on a mix of foreign exchange controls and state-aligned banking. Somary critiques the French and American systems, noting that while they possess massive gold reserves, their central banks' actual influence on the domestic economy varies significantly due to structural differences in their financial markets.
Read full textSomary examines the shift from automatic discount rate adjustments based on gold status to discretionary bank policy. He argues that modern central banks set rates based on 'liquidity policy'—estimating the maximum potential credit demand during peak economic cycles and seasonal lows to ensure they remain within legal emission limits. He provides a comparative analysis of the Reichsbank, Bank of England, and Bank of France, noting that legal frameworks and domestic market structures (like the role of brokers in London) dictate different rate-setting behaviors despite similar gold coverage ratios.
Read full textThis section critiques the emerging theories of using discount rates for price stabilization, specifically discussing the ideas of Knut Wicksell and Alfred Marshall. Somary highlights the practical difficulties of such a policy, including the lack of reliable indices and the necessity for international coordination to prevent capital flight. He explores the potential and limits of international central bank cooperation, concluding that while a global monopoly bank could theoretically stabilize prices, national interests and the need for liquidity in times of crisis make true international solidarity unlikely in the near future.
Read full textSomary analyzes the critical role of central banks as the ultimate source of liquidity during economic panics and wars. He contrasts the 'continental' model of direct market involvement with the Bank of England's detached approach, arguing that the latter allows for more aggressive credit contraction to protect gold reserves. He discusses the psychological impact of legal emission limits, the necessity of suspending these limits during wars, and the modern challenges of 'capital flight' and inflation awareness, which limit the effectiveness of traditional inflationary war financing.
Read full textSomary examines the constitutional structure and economic role of central banks, noting the global dominance of the monopoly system. He discusses the historical evolution of bank charters, specifically the Bank of England's transition from short-term privileges to indefinite status. The segment contrasts private central banks with state-owned institutions, arguing that private structures offer better protection against political interference and currency devaluation during crises, while emphasizing the necessity of central bank independence from government fiscal needs.
Read full textThis section analyzes the governance of central banks and their relationship with state treasuries. Somary critiques the influence of commercial banks and industrial interest groups on central bank boards, arguing that the debtor should not govern the creditor. He explores the 'Einheitssatz' (uniform interest rate) versus regional rates, and discusses how the integration of state treasury management (as seen in England's Exchequer-Bank relationship) vs. the US Independent Treasury system impacts market liquidity and stability.
Read full textSomary provides a detailed analysis of the London money market, describing it as an organic, historically grown entity rather than a rationally designed one. He highlights the unique role of discount brokers as intermediaries between deposit banks and international credit needs. The segment explains how London's market structure allows for high liquidity and international trade financing (rembours), but also notes the lack of centralized organization and the delayed 'alarm signals' provided by the Bank of England during crises.
Read full textA comparison of the Berlin and Paris money markets. Berlin is characterized as a strictly organized, national market focused on industrial operating credits through bank acceptances, dominated by a few large credit banks. Paris is described as a highly liquid market where the Bank of France acts as a central cooperative-style institution, though it lacks a deeply developed acceptance market for international trade compared to London.
Read full textSomary analyzes the transformation of the New York money market following the 1913 Federal Reserve Act. He explains how the lack of a central bank previously forced reserves into the call money market (stock exchange loans), creating volatility. While the reform aimed to develop a commercial acceptance market and decentralize reserves, Somary argues it largely failed to diminish New York's dominance, instead leading to a massive expansion of the call money market and a unique system of daily 'renewal rates' for stock exchange credit.
Read full textThis section challenges the notion of a perfectly integrated global money market. Somary argues that while technology allows for rapid transfers, significant barriers remain, including national trust, lack of knowledge of foreign institutions, and regulatory constraints on insurance and savings banks. He discusses the 'Finanzwechsel' (finance bill) as a dangerous tool for international inflation and explains how capital flows are driven by interest differentials, seasonal cycles, and fears of inflation.
Read full textSomary defines the capital market as the market for investment capital, distinguishing it sharply from the money market based on the purpose and 'binding' of funds rather than just duration. He critiques theorists like Moulton and Hahn who blur these lines. The core argument is that capital market investments involve long-term claims on capital goods or debt, carrying inherent entrepreneurial risk and lacking the immediate 'fungibility' or liquidity of money market instruments, except in the case of organized securities markets.
Read full textSomary analyzes the role of various financial institutions on the capital market, noting that while banks gained leading positions in Continental Europe before the war, their organizational structure is not naturally suited for long-term investment. He distinguishes between mortgage banks and insurance companies, which are suited for long-term assets, and credit banks, which manage volatile deposits. The text categorizes bank activities into mortgage credit, construction credit, industrial investment credit, and securities commission business, while noting that direct long-term industrial ownership by banks has largely been abandoned in favor of temporary consortium-based holdings.
Read full textThis section continues the classification of bank activities, focusing on industrial investment credit provided by credit banks and securities commission business. Somary discusses the risks associated with banks holding government bonds (renten), arguing that despite their perceived liquidity, large-scale bond holdings are unsuitable for credit banks due to the risk of price drops during rapid liquidation and the higher cost of central bank access compared to bills of exchange.
Read full textA detailed examination of mortgage credit, which Somary identifies as the most long-term form of credit. He describes the mechanics of mortgage banks (Pfandbriefinstitute), where liquidity concerns are secondary because the maturity of the bonds (Pfandbriefe) matches the maturity of the loans. The text explores the competition between private mortgage banks, savings banks, and insurance companies, the risks of over-lending ('Schornsteinhypotheken'), and the organizational necessity of local knowledge for rural lending, which often gives local savings banks an advantage over centralized urban institutions like the Crédit Foncier.
Read full textSomary analyzes the determinants of mortgage interest rates, comparing the cost structures of mortgage banks, insurance companies, and savings banks. He explains how mortgage credit expands the demand for real estate by making small savings investable and by providing credit that is cheaper than private equity. The section also addresses the inherent dangers of second mortgages, which are often avoided by banks due to high risk, and the shift from long-term amortization mortgages to shorter fixed-term mortgages in the pre-war period.
Read full textSomary defines construction credit as a hybrid between money market and capital market credit. It is short-term in contract but intended for long-term investment. He highlights the specific risks, such as the lender's potential need to complete a building if the developer fails, and the dependence on the eventual procurement of a long-term mortgage. He notes that the construction market is often the first to stall during a boom and the first to recover when capital becomes fluid.
Read full textThis extensive section defines investment credit (Anlagekredit) as credit exceeding a company's liquid assets, effectively making the bank a partner in entrepreneurial risk. Somary contrasts this with money market credit, noting that investment credit is repaid from profits rather than production cycles and is difficult to mobilize. He critiques Schumpeter's view on credit creation for 'new combinations,' arguing that banks using short-term deposits cannot safely finance unproven innovations. He emphasizes that banks must not become permanent owners of industrial enterprises and should ideally limit investment credit to the amount of the company's own equity.
Read full textSomary discusses how banks procure equity capital for enterprises, noting the shift from the long-term holding model of the Rothschilds to the commission-based model of the Crédit Mobilier. He then explores the 'non-organized capital market'—investments in land, factories, and private companies that lack a standardized exchange. He argues that these markets are characterized by a lack of profit equalization due to local limitations, personal traditions, and the need for specialized industry knowledge, making them generally unsuitable for standard bank operations.
Read full textSomary outlines the fundamental differences between the unorganized capital market and the organized securities market. He emphasizes how the division of investment capital into small units allows for organized market formation, enabling investors to diversify their portfolios and delegate control, which effectively separates the roles of entrepreneur and capital owner.
Read full textThis section analyzes the components of demand and supply in the securities market. Demand is driven by public entities, mortgage banks, and industrial enterprises, while supply is determined by national income levels not used for consumption or directed toward the money market. Somary notes that the degree of capital market development varies by country based on local entrepreneurial habits and the prevalence of private vs. public investment.
Read full textSomary defines the relationship between capital market interest (fixed-income) and profitability (equities). He discusses the upper limits of interest rates for public bodies, mortgage institutes, and industry. He critiques the theories of Hilferding and Lexis regarding the capitalization of entrepreneurial profit during the conversion of private firms into joint-stock companies, arguing that profitability and interest rates often move in opposite directions during the business cycle.
Read full textSomary explores the deep connection between the money market and the securities market, referencing classical and modern theorists like Adam Smith, von Wieser, and Böhm-Bawerk. He explains how capital flows between these markets depending on the phase of the business cycle (depression vs. boom) and the spread between interest rates and equity profitability, using the 1929 New York crash as a primary example of extreme tension between these rates.
Read full textThis section examines the international movement of capital and the political implications of foreign lending. Somary discusses how nations (especially France) have used capital exports as a tool of foreign policy, but warns of the risks: the long-term nature of loans often outlasts political alliances, and the concentration of risk in specific debtor nations can isolate capital markets during crises. He also notes the friction between protectionist trade policies and liberal capital export policies.
Read full textSomary contrasts the English banking system with Continental and American models, focusing on the latter's deep involvement in the securities market. He details the functions of banks in financing, consortium formation (underwriting), and the issuance of securities. He provides practical insights into how banks evaluate industrial enterprises for conversion into joint-stock companies, emphasizing the need for conservative capitalization based on minimum historical earnings rather than peak boom results.
Read full textSomary analyzes the organizational and economic functions of the stock exchange (Börse) as a localized securities market. He discusses how the exchange facilitates rapid transactions, creates average profitability rates, and allows banks to estimate issuance prices with precision. The text contrasts the historical 'wild' speculation of the 18th and 19th centuries with the more 'bourgeois' and regulated modern exchange, while addressing common criticisms regarding the exchange's role in economic crises and the ruin of small investors, which he largely attributes to bank credit policies rather than the exchange itself.
Read full textThis section details the specific requirements for securities to be successful on the exchange: large volume, fluctuating yields, and a reflection of general economic trends. Somary notes a shift toward 'bank placement' (Bankenplacement), where banks and state institutions like postal savings banks (Postsparkassen) bypass the exchange to place securities directly with customers. This decentralized approach is presented as a response to the exchange's intermittent nature and the public's need for steady wealth management rather than speculative volatility.
Read full textSomary explores how banks manage the placement of new securities through personal customer relationships and decentralized branch networks. He discusses the role of investment trusts and the creation of various security types (bonds, preferred shares, common shares) to suit different risk profiles. A significant portion is dedicated to the 'stabilization of dividends' by major continental banks (e.g., Deutsche Bank, Crédit Lyonnais), where hidden reserves are used to maintain steady payouts regardless of actual annual profit, effectively turning industrial stocks into fixed-income-like instruments for the public.
Read full textSomary examines the tension and synergy between bank-led placement and the open stock exchange. He warns against the total displacement of the exchange by banks, noting that without an independent exchange, price transparency vanishes and banks become 'parties' in their own advice, potentially leading to conflicts of interest. The text contrasts the German/Continental system (bank-dominated) with the English system (exchange-dominated) and the American system (a hybrid evolving toward the Continental model), highlighting the risks of bank-driven market manipulation and the loss of public judgment.
Read full textThe final section of this chunk discusses the broader impact of banks on the capital market and their necessary cyclical (Konjunktur) policies. Somary argues that banks must maintain liquidity at the peak of an economic boom to remain effective when the economy needs capital most. He criticizes laws that force savings banks to buy government bonds regardless of interest rate cycles, which led to massive losses during inflation. He concludes that the 'German system' of integrated investment banking requires immense responsibility, as bank leaders' errors can have systemic consequences for both their customers and the national economy.
Read full textThis section analyzes the structure and evolution of the American capital market, centered in New York. Somary describes its transition from a national debtor market to an international creditor market, noting the high degree of organization and the significant role of 'brokers loans' and investment trusts. He highlights the speculative nature of the US market compared to Europe, the shift from bonds to common shares, and the increasing influence of large industrial corporations that manage their own capital needs, often bypassing traditional bank control. The text also notes the historical lack of branch banking and the impact of the Federal Reserve's reserve requirements on market liquidity.
Read full textSomary examines the power dynamics between US banks and industry, arguing that large industrial and railway companies exert more influence on the market than banks due to their massive cash reserves and independent dividend policies. He contrasts this with the European model, noting that US banks lack a branch system and deep insight into industrial operations. The section also discusses the extreme volatility of the New York market, using General Electric as an example, and how this attracts global capital, often at the expense of European market liquidity.
Read full textThe author discusses the decline of London's pre-war dominance as the world's primary international capital market. He attributes this to the loss of American securities during the war, high taxation, and the shift of European financing to New York and Paris. While London remains significant for domestic issues and rationalization efforts, Somary notes a rigid separation between banking and industrial speculation. He observes that the Bank of England has begun to intervene more directly in industrial financing as a 'notstand' (emergency) measure, though commercial banks remain hesitant to follow suit.
Read full textThis segment compares the French and German capital markets. Paris is described as a strong potential creditor market with a high savings rate, currently recovering from post-war inflation. In contrast, Berlin has been transformed from a creditor to a debtor market. Somary details the erosion of German bank capital due to inflation, the loss of foreign assets (like the Baghdad Railway), and the resulting dependence on foreign (especially American) capital. He notes that the influence of German banks over industry has significantly diminished compared to the pre-war era.
Read full textSomary categorizes banks based on how they collect and use deposits: local/decentralized (savings banks), decentralized collection with centralized use (insurance, post office savings), and fully decentralized (commercial and central banks). He analyzes the merits of the branch system ('Filialsystem'), noting that it is essential for capital-rich nations to reach individual savers. He contrasts the 'suction' branches of France and England, which funnel money to the center, with the more autonomous German branches that require skilled local directors to manage complex industrial credits.
Read full textBibliographic note referencing key reports and hearings regarding the American banking system and its concentration tendencies.
Read full textSomary analyzes the international trend toward bank concentration, providing statistical overviews for England, Germany, the United States, Canada, and France. He argues that large institutions possess structural advantages in check processing, deposit collection, and securities placement, leading to the gradual displacement of smaller private bankers who lack the capital and organizational reach to compete with the 'Big Five' or major Berlin banks.
Read full textThis section explores the relationship between central bank existence and the concentration of credit banks. Somary disputes the American democratic thesis that central banks promote concentration, arguing instead that they provide a liquidity safety net that allows smaller banks to operate more elastically. He also discusses the emergence of bank cartels and the 'money trust' phenomenon, noting that while concentration increases systemic stability, it risks neglecting local interests and creating bureaucratic rigidity.
Read full textSomary reviews legislative attempts to curb bank concentration, such as the Clayton Act in the US and merger restrictions in England and Denmark. He transitions into a broader discussion of state bank policy, noting that while savings and mortgage banks are heavily regulated due to social concerns, credit and finance banks have historically remained independent. However, he predicts increasing state involvement as large banks become 'too big to fail,' effectively gaining a moral state guarantee.
Read full textA deep theoretical analysis of the bank's role in the national economy, focusing on their influence over monetary value and business cycles. Somary argues that banks are 'instruments' (like pianos) whose effect depends on the 'player' (the speculative entrepreneur). He discusses the shift in power from banks to industry and the limitations of central bank power in maintaining stability without controlling the entire deposit and securities market. He concludes that the primary task of bank policy is preventing the misuse of the bank's inherent 'expropriation power' for specific interest groups.
Read full textAn international comparative appendix detailing the founding dates, concessions, shareholder rights, and state relations of major central banks, including the Reichsbank, Bank of England, Banque de France, Banca d'Italia, and the Federal Reserve. It covers the legal frameworks governing bank leadership, capital requirements, and the institutional mechanisms designed to ensure independence from the state.
Read full textA comparative overview of how various central banks handle the acceptance of foreign funds and deposits, noting restrictions on interest-bearing accounts for institutions like the Federal Reserve and the Swiss National Bank.
Read full textDetailed regulations regarding the discounting of commercial and agricultural bills of exchange across major central banks, including maturity limits and signature requirements.
Read full textProvisions for Lombard loans and other credit forms, detailing the types of collateral accepted (securities, bills, mortgages) and specific limits for banks in Sweden, Denmark, and Austria.
Read full textCovers the purchase of public securities, bank participations (including the Bank for International Settlements), and the formal procedures for setting discount rates, with a focus on the Federal Reserve Board's oversight.
Read full textA comprehensive list of legal reserve requirements for banknotes and deposits in various countries, specifying the ratios of gold, foreign exchange, and commercial paper required to back the currency.
Read full textRegulations regarding foreign exchange operations and the statutory distribution of central bank profits between shareholders, reserve funds, and the state treasury across multiple European and American systems.
Read full textThis segment concludes the legal overview of central bank obligations to the state, specifically for the UK, France, Switzerland, and Czechoslovakia. It then transitions into 'Appendix B', a comprehensive bibliographic essay on post-war banking literature. Somary distinguishes between purely technical/legal literature and bank-political analysis, critiquing the shift toward purely monetary theory that ignores the specific institutional nature of banks. He reviews key works by English and American authors such as Lavington, Hawtrey, Moulton, and Watkins, noting the lack of systematic German works since the stabilization.
Read full textA review of specialized literature concerning the active and passive operations of commercial banks and the evolution of central bank policy. Somary highlights American technical analyses of discount and current account business (Phillips, Westerfield, Willis) and the lack of equivalent European descriptions. He discusses the history of the Bank of England's discount policy, the influence of the Ricardo school, and the emergence of the Federal Reserve System in the US, citing works by Kisch, Elkin, Warburg, and Burgess. He also notes the verifiability of central bank independence and the impact of seasonal fluctuations.
Read full textThis section covers the theory of the money market, the relationship between interest rates and stock speculation, and the velocity of bank deposits. It reviews literature on the structure of money markets in London, Berlin, and New York, as well as the specialized field of investment trusts. Significant attention is given to international capital movements, the political background of capital migration (imperialism), and the specific literature on German foreign loans and agricultural credit systems in the post-stabilization era.
Read full textA comprehensive alphabetical index (Register) for the entire volume, covering key terms, institutions, geographic locations, and individuals discussed in the text. It serves as a navigational tool for topics ranging from 'Abrechnungsverkehr' (clearing) to 'Zwangskurs' (forced exchange).
Read full text