¹ The main literature is: Lüke, R. E., Von der Stabilisientng zur Krise (Zürich, 1958)Google Scholar; Born, K-E., Die deutsche Bankenkrise 1931. Finanzen und Politik (Munich, 1967)Google Scholar, containing the fullest narrative; Henning, F-W., ‘Die Liquidität der deutschen Banken in der Weimarer Republik’, in Winkel, H. (ed.), Währungs- und finanzpolitische Fragen der Zwischenkriegsziet, Schriften des Vereins fur Sozialpolitik, NF, LXXIII (Berlin, 1973)Google Scholar; Kindleberger, C. P., The World in Depression 1929–1939 (London, 1973)Google Scholar; Hardach, G., Weltmarktorientierung und relative Stagnation. Währungspolitik in Deutschland 1914–1931 (Berlin, 1976)Google Scholar; Bundesbank, Deutsche, Währung und Wirtschaft in Deutschland 1876–1975 (Frankfurt-a.-M., 1976)Google Scholar; Habedank, H., Die Reichsbank in der Weimarer Republik. Zur Rolle der Zentralbank in der Politik des deutschen Imperialismus 1919–1933 (Berlin/East, 1981)Google Scholar; Born, K-E., ‘Vom Beginn des ersten Weltkriegs bis zurn Ende der Weimarer Republik’, in K-E. Born et al., Deutsche Bankengeschichte (Frankfurt-a.-M., 1983)Google Scholar; Hardach, G., ‘Banking and industry in Germany in the interwar period 1919–1939’, Journal of European Economic History, 13 (1984)Google Scholar; James, H., ‘The causes of the German banking crisis of 1931’, Economic History Review, 2nd ser., 38 (1984)Google Scholar; idem, The Reichsbank and Public Finance in Germany 1924–1933 (Frankfurt-a.-M, 1985)Google Scholar; idem, The German Slump: Politics and Economics 1924–1936 (Oxford, 1986Google Scholar) – the best in English; Temin, P., Lessons from the Great Depression (Cambridge, Mass., 1989)Google Scholar; Born, K-E., ‘Bankenkrisen der Zwischenkriegszeit’, in Pohl, H. (ed.), Ursachen, Anlässe und Ueberwindung von Bankenkrisen, Bankhistorisches Archiv. Zeitschrift für Bankengeschichte, Beiheft 17 (Frankfurt-a.-M., 1990)Google Scholar; Eichengreen, B., Golden Fetters: The Gold Standard and the Great Depression 1919–1939 (New York/Oxford, 1992)Google Scholar; and James, H., ‘Financial flows across frontiers during the interwar depression’, Economic History Review, 45 (1992).CrossRefGoogle Scholar

The present article is a revision and extension of Balderston, T., The Origins and Course of the German Economic Crisis: November 1923–May 1932 (Berlin, 1993), pp. 159–173.Google Scholar

James's analysis is of the ‘banking’ type as outlined in the text, in that the critical factor causing the bank collapse in 1931 was the aggravation of the problem of frozen and bad advances to the private sector by frozen advances to the public sector, on account of the disorder of, particularly, local authority finances - this ultimately causing the banks’ creditors to doubt their solvency.

² For an analysis of the banks see Balderston, T., ‘German banking between the wars: the crisis of the credit banks’, Business History Review, 66 (1991), pp. 565–81.Google Scholar

³ For this see esp. ‘Was lehren die Juli–Ereignisse?’, editorial, Bank-Archiv, 30 (7 08 1931), pp. 461–4Google Scholar; ‘Generalversammlung und Geschäftsbericht des Centralverbandes des Deutschen Bank– und Bankiergewerbes für das Jahr 1931’, Bank-Archiv, 31 (15 12 1931), pp. 109–21Google Scholar; Lansburgh, A., ‘Die deutschen Banken im Krisenjahr 1931’, Die Bank, 25 (1932), pp. 459–65.Google Scholar See the banking industry's materials preparatory to the Bank Inquiry of 1933: Centralverband des Deutschen Bank– und Bankiergewerbes, Materialien zur Vorbereitung der Bankenenquêete. Als Manuskript gedruckt (n.p. but Berlin, n.d. but 1933); see too the official papers of the Inquiry: Untersuchung des Bankwesens 1933, Teil I, Referate (Berlin, 1934)Google Scholar, and Inquiry's Report, reproduced (with some abridgment) in ‘Banken-Reform. Das Gutachten des Untersuchungs-Außchußes’, Die Bank (1934), pp. 1777–86.Google Scholar

⁴ This argument is developed in Balderston, T., ‘The banks and the gold standard in the German financial crisis of 1931’, University of Manchester Department of History Working Paper in Economic and Social History no.24 (10 1993), pp. 1–6.Google Scholar

⁵ Lansburgh, , ‘Die deutschen Banken … 1931’, pp. 459–61.Google Scholar

⁶ Hardach, , Weltmarktorientierung, pp. 126–7, 141–2, 152.Google Scholar

⁷ Hoffmann, W. G. et al. , Das Wachstum der deutschen Wirtschaft seit der Mitte des 19 jahrhunderts (Berlin, 1965), pp. 818–28.Google Scholar

⁸ Balderston, , Origins, pp. 97–121.Google Scholar

⁹ Since the value of the Danat's outstanding capital (net of its holdings of its own equity) and published reserves was only 88m Rm in 1931, its engagements with the failed Nordwolle alone (50m Rm), if irrecoverable, brought it close to failure. Something similar may have been true of the Dresdner, though the huge state recapitalisation of July 1931 (300m Rm) reflects the socio-political imperative of rescuing the bank which served as banker to an important section of the credit cooperative movement. See Born, , Bankenkrise, pp. 114, 129, 168–9Google Scholar; Pärsch, , ‘Maßnahmen des Staates hinsichtlich einer Beaufsichtigung und Reglementierung des Bankwesens’, in Untersuchung … 1933, Teil I/II, pp. 48ffGoogle Scholar; Lansburgh, , ‘Die deutschen Banken … 1931'.Google Scholar

¹⁰ Though it probably commenced with the budgetary crisis of June/July: cp. ‘Chronik der Wirtschaft: Kreditbanken und Vertrauenskrise’, Die Bank (1930), p. 1722.Google Scholar

¹¹ James, , The Reichsbank, p. 360Google Scholar; Eyck, E., Geschichte der Weimarer Republik, 2 vols (Zürich/Stuttgart, 1954), vol. II, p. 366.Google Scholar

¹² Another possibility is that depositors feared Communist or Nazi–instigated interference with their assets, though the simultaneous falls in deposits at savings banks – essentially populist and municipally owned institutions – seem to argue against this. New deposits at savings banks had slumped in May 1929: Konjunktur-Statistisches Handbuch 1936, edited by Wagemann, E. (Berlin, 1936), p. 141.Google Scholar

¹³ Mellinger, , ‘Auslands-Aktiven und Liquiditätspolitik der deutschen Banken’, Die Bank, 23 (1930), pp. 1721.Google Scholar For foreign reserves and the note issue, see James, , The Reichsbank, p. 360.Google Scholar

¹⁴ Katona, G., ‘Die Banken in der Krise’, Der Deutsche Volksivirt (17 04 1931), pp. 966–8Google Scholar, argues that the banks protected their advances to clients at the expense of their liquid assets during the autumn 1930 crisis.

¹⁵ Schubert, A., The Credit-Anstalt Crisis of 1931 (Cambridge, 1991), pp. 26–7.Google Scholar At first depositors regarded the announcement of the Credit-Anstalt's difficulties as information applicable to all Austrian banks, and cashed deposits with all of them; but they soon came to treat the Credit- Anstalt's difficulties as peculiar, and the deposits at the other banks began to rise.

¹⁶ James, , The Reichshank, p. 188.Google Scholar

¹⁷ RKG liabilities followed their own peculiar laws of motion, presumably because of its different depositor structure on account of its origin as a wartime financial agency of the Reich enterprises.

¹⁸ Though not of foreign deposits. According to James, , The Reichsbank, p. 179Google Scholar, the proportion of foreign to total bank deposits in mid-1929 varied between 35% and 44% for all great banks except the BHG, for which it was 66%.

¹⁹ Balderston, , Origins, pp. 293, 452, col. 3.Google Scholar

²⁰ The Danat also lost deposits by other German banks in April. However, the movement of such balances at individual great banks shows inexplicable and sometimes quite violent variation, those at the Danat not being noticeably more volatile that those at the De-Di or BHG.

²¹ The percentages of the great banks' balances at other banks which were held at less than seven days' notice at the ends of various months were as follows:

^aCompri [and hereafter] = Commerz- und Privatbank.

Source: Monthly bank balances are reproduced in Die Bank.

²² In 1930 and 1931 this instability particularly afflicted its medium-term deposits (7 days to 3 months); not so in 1929.

²³ The argument advanced by Lüke, R. E., Die Berliner Handelsgeselkchaft in einem Jahrhundert deutscher Wirtschaft 1856–1956 (Berlin, 1956), p. 226Google Scholar, and adopted by Born, , Bankenkrise, p. 67, that the BHG was protected by the term of its foreign liabilities, is not borne out by the heavy deposit losses it suffered in June and July: see Table I(iii).Google Scholar

²⁴ Alternatively, foreign currency deposits might have been substituted for Rm deposits.

²⁵ The banks generally re-lent foreign currency deposits as foreign currency advances to borrowers, who in turn bought forward the foreign currency due on the repayment date. Cp. Balderston, , Origins, p. 141.Google Scholar The problem would arise if these hedging arrangements broke down in a crisis.

²⁶ Ausschuß zur Untersuchung der Erzeugungs- und Absatzbedingungen der Deutschen Wirtschaft [Enquête-Ausschuß], Unterausschuß V, Bd II, Der Bankkredit (Berlin, 1930), p. 104Google Scholar; Lansburgh, , ‘Kreditoren Rueckgang’, Die Bank (1929), esp. p. 447Google Scholar, maintained that foreign currency deposits were also repaid, but the Bank Credit Inquiry's sources must be considered superior and its argument a refutation of those who criticised the banks’ over-ready resort to the Reichsbank.

²⁷ These are reprinted in spring 1930 issues of Die Bank.

²⁸ cp. also Lansburgh, , ‘Die Berliner Grossbanken im Jahre 1928’, Die Bank (1929), p. 213Google Scholar; Fischer, O. C., ‘Die fehlerhafte Kreditpolitik’, in Untersuchung … 1933, Teil I/I, p. 523Google Scholar, who confirms that the banks distinguished foreign from domestic assets and liabilities in their internal accounting and control, and presumably also foreign currency from Reichsmark.

²⁹ ‘Outside’ liquidity is defined here to exclude claims of the banks on each other, or on the stock market, which all banks cannot simultaneously realise. On the predominantly foreign character of the banks’ balances with other banks, cp. De-Di, Annual Report for 1929: 72% of balances with other banks (Nostroguthaben) were foreign balances; also Mellinger, , ‘Auslands-Aktiven’, p. 1723Google Scholar. See further Balderston, , Origins, p. 166.Google Scholar That the great bank with the highest proportion of foreign deposits – the BHG – also had the highest ratio of balances at other banks to bills supports the inference. Such balances fell precipitously after 1931, as did foreign short debts. See too n. 30 below.

³⁰ Lansburgh, , ‘Die Berliner Grossbanken 1928’ p. 567Google Scholar, speaks of ‘Diese Hauptreserve gegen plötzliche Zurückziehung von Auslandskrediten’. Idem, ‘Die Berliner Grossbanken im Jahre 1927’, Die Bank (1928), p. 200Google Scholar, ‘jederzeit greifbare Reserven bei den Auslandsbanken’.

³¹ Mellinger, , ‘Auslands-Aktiven’, pp. 1723–4Google Scholar; idem, ‘Kreditbanken in der Vertrauenskrise’, Die Bank (1930), p. 1708Google Scholar, also explains the small decline in the banks’ balances at other banks on these grounds, cp. von Bissing, W. M., ‘Die Schrumpfung des Kapitals und seine Surrogate’, in Untersuchung … 1933, Teil I/I, p. 74.Google Scholar However, Mellinger's argument seems (I) to ignore the testimony of the Bank Credit Inquiry, p. 114, that in spring 1929 it was mainly Rm deposits that were withdrawn, as well as neglecting the net importance of Rm deposit withdrawal in 1930 (see below); and (2) to exaggerate the proportion of balances requiring notice of withdrawal (cp. n. 21 above).

³² Puhl, E., ‘Reichsbank: Wiederaufbau des Geld- und Kapitalmarkets’, in Untersuchung … 1933, Teil I, Bd I/II, p. 144Google Scholar; Mellinger, , ‘Auslands-Aktiven’, p. 1723.Google Scholar

³³ Balderston, , Origins, p. 451, col. 3.Google Scholar

³⁴ cp. the balance sheets for February and March 1928: Die Bank (1928), pp. 318–9, 346.Google Scholar

³⁵ cp. n. 18 above.

³⁶ Lansburgh, A., ‘Die Berliner Grossbanken im Jahre 1930’, Die Bank, 24 (1931), p. 448.Google Scholar

³⁷ Mellinger, , ‘Auslands-Aktiven’.Google Scholar

³⁸ James, , German Slump, p. 302.Google Scholar

³⁹ The Reichsbank's bill portfolio rose but not its note issue, suggesting that hoarding currency because of distrust of banks was not the cause: James, , The Reichsbank, p. 361.Google Scholar

⁴⁰ cp. n. 6 above.

⁴¹ Jacobson, J., Locarno Diplomacy: Germany and the West 1925–1929 (Princeton, NJ, 1972), p.xxx, rules out politically motivated French withdrawals.Google Scholar

⁴² On this, see Balderston, T., ‘A comparison of British and German monetary policy’, in Feinstein, C. H. (ed.), Banking, Currency and Finance between the Wars (forthcoming).Google Scholar

⁴³ McNeill, W., American Money and the Weimar Republic: Economics and Politics on the Eve of the Great Depression (New York, 1986), pp. 220–1.Google Scholar

⁴⁴ Balderston, , Origins, pp. 296–331.Google Scholar For this argument the distinction between fiscal indiscipline and rationally controlled deficits is vital.

⁴⁵ Ibid., pp. 145, 407–8; idem, ‘Comparison’.

⁴⁶ Balderston, , Origins, pp. 212–4, 332–5, 361–3.Google Scholar

⁴⁷ Temin, , Lessons, pp. 68ff.Google Scholar; Eichengreen, , Golden Fetters, pp. 272–8.Google Scholar

⁴⁸ cp. Schacht's well-known remark in 1926 about the ‘two Reichsbanks’ in Germany – the one he represented and that represented by the foreign credits. Enquête-Ausschuß, , Unterausschuß V, Bd I, Die Reichsbank (Berlin, 1929), p. 203.Google Scholar

⁴⁹ These are the main signs of German bank borrowing from foreign banks. ‘Liabilities for clients’ were the liabilities of German banks as underwriting the extension of reimbursement credits to German non-bank businesses. This became the general means of finance of German foreign trade after the war, when the mark bill was no longer acceptable abroad, but became, especially after 1927, a general means by which foreign banks lent to German clients: von Bissing, , ‘Die Schrumpfung des Kapitals’, p. 67Google Scholar; Fischer, , ‘Die fehlerhafte Kreditpolitik’, p. 514.Google Scholar

⁵⁰ It was after the autumn 1930 crisis that the banks had to begin large purchases of their own equity to support its price: Born, , Bankenkrise, p. 60.Google Scholar

⁵¹ Ibid., pp. 77, 95; James, H., ‘Did the Reichsbank draw the right conclusions from the great inflation?’, in Feldman, G. D. (ed.), Die Nachwirkungen der Inflation auf die deutsche Geschichte 1924–1933 (Munich, 1985), pp. 223–4Google Scholar; idem, German Slump, p. 303.Google Scholar

⁵² It can be inferred from the balance sheets that each of the four great banks, other than the BHG and RKG, wrote down asset values at the end of 1931 by a rather similar 6%. What distinguished the Danat, the Dresdner and the Compri was that, once their own holdings of their own equity are subtracted, their net outstanding capital and published reserves amounted to only about 4% of their balance sheet totals, whereas for the De-Di, the RKG and the BHG this percentage was c.9%. The low and diminishing capitalisation of all banks suggests an optimistic view in the 1920s of prospective business conditions under the restored gold standard ‘policy regime’, rather than the apprehen sion that this spelt deflation.

⁵³ contra Eichengreen, , Golden Fetters, p. 228.Google Scholar On the soundness of ‘universal’ banking, see especially Weber, A., Depositenbanken und Spekulationsbanken. Ein Vergleich deutschen und englischen Bankwesens (Leipzig, 4th edn, 1938)CrossRefGoogle Scholar; for my views, see Balderston, T., ‘Universal banks’, in The New Palgrave Dictionary of Money and Finance (London/New York, 1992), vol. III, pp. 732–5.Google Scholar Since what sank the Danat was mainly fraudulence in the management of the Nordwolle, there was no reason to infer from this that the rest of its business was unsafe or that its reconstruction was unsatisfactory.

⁵⁴ Balderston, , ‘German banking between the wars’, p. 566.Google Scholar In this part the argument of Balderston, , Origins, p. 179, has been revised.Google Scholar

⁵⁵ See n. 25 above.

⁵⁶ Born, , Bankenkrise, pp. 12, 182–3.Google Scholar

⁵⁷ On the Bank Inquiry and the subsequent legislation see James, H., ‘Innovation and conservatism in economic recovery: the alleged “Nazi recovery” of the 1930s’, in Garside, W. R. (ed.), Capitalism in Crisis: International Responses to the Great Depression (London, 1993), pp. 75–6Google Scholar, Hardach, , Weltmarktorientierung, pp. 229–30.Google Scholar See too Ernst, F., ‘Grundzüge des Reichsgesetzes über das Kreditwesen’, Bank Archiv, 24 (1935), pp. 379–90. Essentially, the banks could turn the Inquiry and subsequent legislation to their own advantage.Google Scholar

⁵⁸ Had the banks borrowed less from abroad, non-bank businesses would have borrowed more, i.e. the share of foreign banks in the German credit business of the time would have been even larger. cp. Balderston, , ‘German banking’, p. 568–74.Google Scholar The history of foreign direct credits during the financial crisis is relevant to the explanation proposed here, but estimates differ. The Layton Report 1931 (‘The Credit Situation of Germany. Report of the Committee appointed on the recommen dation of the London Conference, 1931’ [chairman, Albert Wiggin], reprinted as supplement to the Economist, 22 08 1931), Annexe IV, estimated a decline of 25% in German non-bank short debts to abroad between the ends of December 1930 and July 1931, as against 29% for banks. This is plausible, since non-bank debts would generally be at longer notice and in foreign currencies. However, Untersuchung … 1933, Teil II, p. 462, estimates a much smaller decline for non-bank than for bank short debts. The matter would need to be pursued through the archives of major non-bank German firms.Google Scholar

⁵⁹ Even before 1914 foreign short debts had made up 15–20% of the German banks' short liabilities: Mellinger, , ‘Auslands-Aktiven’, p. 1722.Google Scholar cp. Lindert, P., Key Currencies and Gold, Princeton Studies in International Finance, no. 24 (Princeton, NJ, 1969).Google Scholar

⁶⁰ Krüger, P., Die Aussenpolitik der Republik von Weimar (Darmstadt, 1985), pp. 298–9, 394, 412, 513.Google Scholar

⁶¹ See esp. Balderston, , ‘Comparison’Google Scholar; also James, , ‘Financial flows’, (though fiscal crises alone are an insufficient explanation, in my view).Google Scholar