Regulation, Taxation, and the Development of the German Universal Banking System, 1884-1913

Abstract

The historical literature has traditionally paid much attention to the role of universal banking in the industrialization of Germany and has presumed, in line with Gerschenkron (1962), that the system gained preeminence in the late nineteenth century due to the general 'backwardness' of the economy. Some researchers have stressed legal and political factors in the evolution of German financial institutions, placing particular emphasis on the Stock Exchange Law of 1896. The 1896 law, because it restricted the allowable activities of the securities exchanges, is seen as promoting the growth and concentration and possibly also monopoly power in the universal banking sector. Two important tax levies on securities market business, arriving shortly before and after the 1896 law, are also considered as an catalyst for change in the financial system. Despite the many claims made about the impact of regulation and taxation, though, a convincing quantitative analysis of the multiple influences is still lacking.

The current paper begins to fill this gap by examining company law and stock exchange regulations from the 1870s until the onset of World War I and by investigating the measurable effects of this legal framework on the development of the universal banking sector from 1884 to 1913. The analysis covers three hypothesized areas of impact: concentration, overall growth, and volume of business relative to the stock markets. The findings indicate that the size and volume of the German universal banks developed in a strong, but sustained, manner throughout the period considered, and concentration of the sector increased less than the conventional wisdom supposes. None of the three considered indicators reacted significantly to the 1896 stock exchange law, but all three appear to have increased weakly in response to taxes. Comparison with the British deposit banking sector indicates that the two countries followed nearly identical paths towards increasing concentration between 1884 and 1920, and that indeed the greatest push towards concentration came between 1913 and 1920 - long after the regulation and taxation episodes in Germany. Moreover, in spite of the growth of the German universal banking sector during the period, the British deposit banking sector was still markedly larger in 1913 (normalized by GNP). Thus, the evidence suggests that the effects of individual pieces of legislation were small compared to other changes in the economy.

Keywords: Stock market, taxes, regulation, universal banking, concentration

JEL Classification: G1, G2, K2, L1, N2