Stabilization of the German financial system through the creation of the Central Bank, 1876-1914

Abstract

Without any monetary harmonization of many competing units account and the existence of a central bank, the German Empire was one of the longest experiences of free banking system among the most industrialized European countries in the 19^th century. The "free banking" in the Reich was typified by a financial instability and many violent banking crises during periods of war. This article is a backward analysis of the stabilization of the German banking system through the creation of a central bank whose major role was to be a lender of last resort, to establish strategic gold reserves and to tone down the speculation trends. Between 1876 and 1914, the banking regulation in the German Reich had the effect of limiting the number of Issuing Banks and counteracting the systemic nature of usual financial crises. Through this historical example, we have seen how the young ReichsBank newly emerging at this time, was able to accommodate to its new economic environment in order to carry out its mission of central banking. Originally designed on a similar basis to the Bank of England in terms of coverage of the issuing bills, the ReichsBank was sometimes expected to be more flexible in its monetary policy. The art of setting a socially fairly level of the interest rate, is for the central bankers of the 19^th century, a challenging exercise whose good interpretation and acceptance by the capitalist society are difficult to predict. Furthermore, many elements are beyond the control of the ReichsBank, this is the case, for example, the future of the trade balance, which depends both on the price competitiveness of the country and other complex factors that can affect national production.