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Die Kreditbanken in der Gr?nderzeit

Author(s):Burhop, Carsten
Reviewer(s):Guinnane, Timothy W.

Published by EH.NET (February 2008)

Carsten Burhop, Die Kreditbanken in der Gr?nderzeit. Stuttgart: Franz Steiner Verlag, 2004. 279 pp. ?38 (paperback), ISBN: 3-515-08413-4.

Reviewed for EH.NET by Timothy W. Guinnane, Department of Economics, Yale University.

Ever since their appearance in the 1850s, Germany?s large, universal banks have been the object of admiration, fascination, and sometimes fear. Throughout the nineteenth century they grew in size and influence, provoking worries that they were responsible for an unhealthy concentration of wealth and power. A long tradition assigns to these banks a central role in Germany?s late but rapid industrialization. Most economic historians have at least heard of them via the work of Alexander Gerschenkron, although for some reason, Anglo-Saxon scholars are only aware of Gerschenkron?s admiring comments. He, too, was skeptical of their power in the Germany economy, a point that usually gets lost in secondary accounts.

Despite all the interest, many discussions of the Kreditbanken, as they are known, rested on a weak scholarly basis. Most accounts relied on close knowledge of a small number of banks, usually the very largest. Richard Tilly began to remedy this weakness in the 1960s (Tilly 1966, 1986). More recent studies have been even more skeptical of earlier claims about the banks; Edwards and Ogilvie (1996), for example, effectively demonstrate the implausibility of most admiring claims about the Kreditbanken. In an extended project that began with her dissertation, Caroline Fohlin has zeroed in on several of the main claims about these banks? distinctiveness. Her recent book (Fohlin 2007) extends her original focus on the bank?s role in firm governance to broader questions, including the connection between the banks and the performance of German securities markets.[1]

The book under review here is part of this re-assessment. Die Kreditbanken in der Gr?nderzeit was originally a doctoral dissertation completed at the University of Bonn in 2004, but has served as the starting point and basis for a great deal of subsequent, detailed research on this theme. The dissertation itself reports the basic results of extensive, well-conceived primary research on the banks. The later papers draw on this research to examine several specific features of the way the banks operated. Not all of the later papers have been published yet, but I expect them to appear in due course in international journals. The dissertation itself will probably never appear in English. Given its quality, it warrants extensive comment.

The book has four substantive sections. The first section provides an outline of the economics of banking and the German economy in the period of this study, usually 1870-1879. Burhop is to be commended for a clear, cogent explanation of the central role of informational asymmetries in banking structure. The second section works through the basic accounting measures of bank size and performance, illustrating how different business strategies led to different types of risks and returns. Many readers will find this dry, but its clarity makes it worth close reading. The third section traces the early days of selected Kreditbanken. The strength of this section is to demonstrate, as only a series of case studies can, the great diversity in the origins, strategy, and early results of the several banks. The fourth substantive section focuses on the defining feature of universal banks, which is their role in underwriting securities. Here Burhop again relies on a selection of specific bank histories to make his points about the role of the banks in German securities markets.

The dissertation per se has two great strengths, both of which will spill over into the later research. The first is the care with selecting the banks for study. Burhop starts with a ?universe? of all credit banks defined by earlier studies, but is unusually careful in accounting for the fact that some are missing crucial information, and some exit the sample before the end of his period because they failed. By augmenting this information with archival material for a selection of banks, he has achieved a good representation of the best of both worlds: completeness of coverage, but also depth on some banks. The second strength is his ability to bring to bear on the German banking literature what in another context might be viewed as simply good accounting. Burhop carefully and clearly explains how different banking strategies, and experiences, led to different returns on invested capital, and difference sources for those returns.

The dissertation is long on specifics and short on generalizations. But two themes run through the results. First, two historical events combined to produce the Gr?nderboom in which the early Kreditbanken flourished. The first was France?s quick payment of the indemnity imposed after the Franco-Prussian War; many German governments paid off most of their debts, leaving investors looking for new places to park their money. Bankers were happy to oblige. The second, and less emphasized, event was the introduction of general incorporation. Prior to 1867, entrepreneurs could not form a joint-stock firm without the specific permission of the state. Prussia and other German states had been very tough about granting this concession. With liberalization many new firms were formed, some of them Burhop?s banks. Just as importantly, founding new firms was an important activity for the new banks. The literature on German banking history has always stressed the role of the French indemnity, but has had less to say about the important change in company law.

Burhop also is fond of noting some ironies in the timing of bank formation. Banks that were started in 1870 and quickly got involved in the securities business often just as quickly regretted it ? the equity market crashed in 1873, leaving some banks with securities they had underwritten and could not sell. Banks that had the ?misfortune? of a late start actually did better than those who got a head start.

Two articles that emerged from the dissertation project give a sense of the range of questions these banks raise. One article uses the methods of time-series econometrics to ask whether the banks ?caused,? in the statistical sense, Germany?s industrialization (Burhop 2006). What one thinks of such exercises is partly a matter of taste; for my money, this kind of research has a useful but limited role to play in developing our understanding of the way financial institutions contribute to economic development. Burhop (2004) digs into the way the banks compensated their executives, more than a few of whom were among the bank?s founders. Many readers will be amazed to learn that the banks often devoted large proportions of their net revenues to incentive schemes for managers. In the early 1870s the managers (Vorstand) of the D?rmstadter Bank, for example, took around ten percent of bank profits in their capacity as managers, and not as share owners. These incentive payments were a huge proportion of their total pay from the bank; for the top managers, incentive pay was more than 80 percent of total compensation. This payment system raises all the questions we associate with the stock-options scandals of the 1990s and early twenty-first century in the United States. One could ask how much these payments were really the fruit of high-powered incentives needed to propel managers to hard work, and how much reflected cozy relations with the entities responsible for setting their pay.

The dissertation and later articles mark an important step in our better understanding of the German Kreditbanken and their role in the German economy. The combination of careful empirical work, sensible use of economic and financial theory, and broader understanding of the German economy are just what is needed in research on these and other financial institutions.

A Bigger Picture

Much of the recent literature on the German Kreditbanken has maintained an almost claustrophobic focus on these banks alone, to the exclusion of the rest of the German banking system.[2] There are good and bad reasons for doing so. Burhop (and Fohlin, and others) are certainly justified in arguing, explicitly or implicitly, that the Kreditbanken were the only part of the system that were individually large institutions, that they were the only banks that usually had a country-wide presence, and that they were the primary source of finance for industry especially. And while they might not have been entirely unique (in the strict sense of that word) the German Kreditbanken?s methods were sufficiently different from banks in other major economies in the nineteenth century that it is understandable that scholars such as Alexander Gerschenkron assigned to the Kreditbanken a major role in Germany?s industrialization and development. As such they are worthy of detailed study. In any case, we all have to specialize, and there is no sense in which a scholar of these banks should be criticized for not studying something else.

But we should not accept the implication (by omission, at least) that the other parts of the banking system are not worth close study. In addition to a number of specialized banks for mortgages and other purposes, the German banking system had two other classes of institutions largely unfamiliar in the Anglo-Saxon world: credit cooperatives (Kreditgenossenschaften, but also called by several other names) and savings banks (Sparkassen). For the cooperatives the reader can refer to my own work (see, for example, Guinnane 2001 and 2003). One would be hard-pressed to assign to these individually very small institutions any major role in German economic development; their importance (at least to me) rests on the intellectual issues they raise, although they clearly mattered to their owners, borrowers, and depositors.

The more important current lacuna in the literature concerns the Sparkassen.[3] The Sparkassen were, collectively, larger than the Kreditbanken, taken together (see Guinnane 2002, Table 1). The Sparkassen and their regional affiliates, the Landesbanken, were owned and controlled by local authorities, either a city or a regional government. As such their depositors enjoyed an iron-clad deposit guarantee (unless the government itself went bankrupt, which was not a realistic fear until after World War I). The Sparkassen were intended to provide a safe place for working-class deposits, but contemporaries were aware that most Sparkassen deposits actually came from middle-class and professional households who lacked good alternatives at other banks. Here we see the first question one might pose about the relationship among the various classes of German banks: as Burhop notes, the Kreditbanken did not begin to take deposits in the modern sense until the 1870s, and as late as World War I, retail deposits were not a significant part of their liabilities. Instead, most large German banks had very low leverage ratios; they were, in effect, lending mostly their own money. This meant the banks had to worry less about the liquidity of their loan portfolios (owners cannot as easily ?run? on the bank as can depositors) and reduced the information problems associated with lending someone else?s money.

Burhop and others have noted the importance of this fact for the lending practices of these banks, but none, to my knowledge, ask what it had to do with the strength of the Sparkassen (and to a less extent, the credit cooperatives). I can think of two hypotheses to explore. First, how much of the Kreditbanken?s policies were in effect forced on them by the difficulty of raising deposits in the face of these competitors? One might think that Kreditbanken would not only have to pay higher interest rates to pry depositors away from the Sparkassen; such depositors might also be more likely to ?run,? given the safe haven of the Sparkasse, often literally down the street.[4] Second, as in most countries, the German banks were periodically the objects of political fears about their size and power. In the United States, the development and persistence of the unit banking system owes much to two specific concerns. One was the generalized fear of large financial institutions. A second was the more specific fear that regional banks would ?siphon? capital out of an area to invest at higher rates elsewhere; that is, local savings would not be available to fund local investments. Scholars familiar with the history of banking in the United States will wonder whether the credit cooperatives and the Sparkassen reduced the fear of large, centralized banking institutions in part by giving any locality in Germany a simple way to create its own banking institution that would provide services even if Berlin bankers were not interested.[5]

Another important outstanding question concerns Sparkassen loan portfolios. Most scholars simply repeat the assertion that the Sparkassen lent most of their funds to governments and put the rest in very safe mortgages. Most accounts claim these banks almost never lent to industry. A few accounts, on the other hand, claim just as baldly that they routinely did. I know of no study what would justify either opinion. We can probably safely assume that prior to World War I, when the Sparkassen were empowered to take on many of the roles of a universal bank, their involvement with industrial lending was minimal. But there are two possible objections here. First, we need to know more about what the Sparkassen actually did on the lending side. Assertions, no matter how confident or time-worn, are not a good substitute for research. Second, we need to ask what indirect roles the other parts of the system played in industrial lending. Here the questions become more speculative. One could imagine, for example, that a well-functioning system for mortgage lending made it easier for firms and cities to finance the large-scale infrastructure projects (such as electrification) that were so important to the Kreditbanken?s customers. In any case, even if the Sparkassen did little direct lending to industrial firms, it strains credulity to believe that institutions of this size had no indirect impact on German industrialization.

Burhop (and Fohlin, and the others who have built this reassessment of the Kreditbanken) are to be commended for setting the operation and characteristics of these banks on much firmer empirical and theoretical foundations than had ever before been the case. Burhop in particular has, in my judgment, made a major advance in the research reported here and elsewhere. But we need someone else, probably several scholars, to follow up on the Sparkassen. When I began my research on the credit cooperatives, a number of German economic historians were overtly contemptuous of the idea of spending any time on what they viewed as quaint, irrelevant institutions. I can only hope that those embarking on a career in banking history today will not be put off by the similar attitude toward the Sparkassen. If we are going to understand how banks contributed to the development of the German economy, we need close study of all its banks.


1. Fohlin wrote several articles before combining and extending her work in a recent book (Fohlin 2007). Fohlin?s book has been reviewed recently in a number of outlets, and will not be discussed further here. Burhop reviewed it at and Dieter Ziegler, another German historian of banks, reviewed it There is of course a more extensive literature on the banks in German, which I will not discuss here. Guinnane (2002) contains references to much of that until that date. Much of the most recent research on Kreditbanken focuses on their role in the Nazi era.

2. In reading the next few paragraphs, the reader might notice a slightly irritating sound in the background. That sound is the grinding of an ax. Guinnane (2002) is the complete recording.

3. In addition to specialized institutions such as mortgage banks, Germany also had private banks that thrived even after the development of the large, joint-stock bank. Scholars are well aware of the role these private banks played, often working closely with Kreditbanken. See Wixforth and Ziegler (1994).

4. Burhop quotes a decision by the Schaffhausen, the first of the large, joint-stock banks, to decline to take deposits and instead rely on its own resources (note 201, pp. 80-81). The Schaffhausen was formed out of an earlier private bank that had failed in the panic of 1848. I know of no connection to Sparkassen in this incident, but surely the bank?s managers were acutely aware of the problems panics could pose to banking institutions.

5. A recent paper argues a version of just this: Hakenes and Schnabel (2006) argue that the main reason for public banks such as Sparkassen is that they constrain capital from leaving the area where depositors live.


Burhop, Carsten, 2004. ?Executive Remuneration and Firm Performance: The Case of Large German Banks, 1854-1910.? Business History, 46 (4), October 2004, 525-43

Burhop, Carsten, 2006. ?Did Banks Cause the German Industrialization?? Explorations in Economic History, 43 (1), January 2006, 39-63

Edwards, Jeremy and Sheilagh Ogilvie, 1996. ?Universal Banks and German Industrialization: A Reappraisal.? Economic History Review 49 (3): 427-446.

Fohlin, Caroline, 2007. Finance Capitalism and Germany?s Rise to Industrial Power. New York: Cambridge University Press.

Gerschenkron, Alexander, 1962. ?Economic Backwardness in Historical Perspective,? in Economic Backwardness in Historical Perspective: A Book of Essays. Cambridge, MA: Harvard University Press.

Guinnane, Timothy W., 2001. ?Cooperatives as Information Machines: German Rural Credit Cooperatives, 1883-1914.? Journal of Economic History 61(2): 366-389.

Guinnane, Timothy W., 2002. ?Delegated Monitors, Large and Small: Germany?s Banking System, 1800-1914.? Journal of Economic Literature 40: 73-124.

Guinnane, Timothy W., 2003. ?A ?Friend and Advisor?: External Auditing and Confidence in Germany?s Credit Cooperatives, 1889-1914.? Business History Review 77: 235-264.

Hakenes, Hendrik, and Isabel Schnabel, 2006. ?The Threat of Capital Drain: A Rational for Public Banks?? Preprints of the Max Planck Institute for Research on Collective Goods.

Tilly, Richard, 1966. Financial Institutions and Industrialization in the Rhineland, 1815-1870. Madison: University of Wisconsin Press. Tilly, Richard, 1986. ?German Banking, 1850-1914: Development Assistance for the Strong.? Journal of European Economic History 15 (1): 113-152.

Wixforth, Harald and Dieter Ziegler, 1994. ?The Niche in the Universal Banking System: The Role and Significance of Private Bankers within Germany Industry, 1900-1933.? Financial History Review 1(2): 99-120

Timothy W. Guinnane is the Philipp Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Current projects include a comparative history of company law, with Ron Harris, Naomi Lamoreaux and Jean-Laurent Rosenthal, focusing on France, Germany, the United Kingdom and the United States in the period 1800-2000 (see ?Droit et capital ? l??preuve de l?histoire: l?essor des soci?t?s ? responsibilit? limit?e? forthcoming in Annales E.S.C., and available in English as SSRN paper #1071007); and continuing work on German cooperatives and their role in the banking system.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
Time Period(s):19th Century