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German Industrialisation and Bank creations
The German industrialisation was an important driver for the creation of banks and a more extensive use of paper money in Germany.
The economic change from agriculture and small scale production to industrial production caused a great demand for capital accumulation. Traditionally the wealth of individuals and their families sufficed to fund investments in the economic infrastructure and production.
The industrialisation, however, required much larger amounts of money to be invested in machinery, fabric equipment and infrastructure. The larger the required amounts, the harder it became to raise the necessary funds in the traditional way, i.e. via direct personal investment. As a result the use of financing via stocks and bonds became more wide-spread to accumulate the required capital. This process required well-organised and trustworthy intermediaries. As a result a wave of bank creations emerged.
In Germany the industrialisation started in the first half of the 19th century – much later than in England. These are some of the early infrastructure projects in Germany related to the industrialisation:
- 1835 first German railway line Nuremberg and Fürth.
- 1838 railway between Berlin and Potsdam
- 1839 railway between Leipzig and Dresden
Between 1850 and 1870 the German railway network tripled from 5,822 km to 18,560 km. A development that required enormous amounts of capital to be raised.
In 1850 the German textile industry was already heavily mechanised, while most other industries still lacked the mechanical support of machines and relied heavily on human labour. This changed during the 1860s and 1870s, when the steel and many other industries boomed in Germany and switched to a mechanised production method - based on the extensive use of machines. Large amounts of capital were to be raised for these industrial investments.
The industrialisation was accompanied by the creation of banks, which collected the money from investors and made it available for the large investment projects. In the early years these were not only industrial, but also agricultural projects. But industrial investment soon became the main direction of the capital flow. The new production methods promised much larger returns than agriculture.
Investments were not only limited to Germany but were also used to fund foreign projects. Much German money was invested for instance in the United States and the newly acquired German colonies. In all this the banks played a key role as facilitators to raise finance and investors of their own capital.
Some of the early bank foundations in the German states are:
- 1824 Pommersche ritterschaftliche Privatbank Stettin
- 1835 Bayerische Hypotheken- and Wechselbank Munich
- 1847 Anhalt-Dessauische Landesbank
- 1851 Berliner Diskontogesellschaft
Many more followed quickly during the 1850s, 60s and 70s.
At the same time the circulation of money (denominated in Thaler and Gulden) increased significantly. The different currencies, legal frameworks, custom laws and other economic circumstances in the different German states slowed down trade and industrialisation. With the increased economic and trading activity the need for a secure, easy to handle and impersonal means of payment became ever larger. Coins had for many years proved impractical. The draft - usually used between trading partners – was associated with specific firms or persons (to secure a draft several signatures by authorised directors were needed). The urge for paper money increased.
The issue of paper money, however, was initially seen as problematic. Too many experiments in the past had failed – most notoriously the French busts in the 18th century after the Banque Royale desaster in 1718 and the failure of the Assignats in the 1790s. But the economic value of paper money eventually did weigh more than the perceived risks and results of mismanagement.
So in many of the German states banks were founded for the purpose of issuing banknotes in their respective areas and beyond. Elsewhere the right to issue money was given to existing banks. The various issuing banks were active not only in their home states, but also they tried to place their banknotes in other German states. This was important especially for the banks from the smaller states, which had only very limited opportunities in their home states. So they tried to compete in the larger states, as well, to broaden their customer base.
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