TCH: Disconto-Gesellschaft

??????????? Disconto-Gesellschaft was one of the first modern banks in Germany. Yet, for all its eventual success, it emerged in a roundabout way given that the Prussian government, and society at large, was not particularly welcoming of a bank. Its founder remained committed though and the bank grew to fund the industrialization of Germany, a benefit of such a bank that, had the government conceived of it, might have brought that industrialization a decade sooner. In any case, Disconto-Gesellschaft’s story is fairly illustrative of banking in Germany in the second half of the 19th century.

David Hansemann

??????????? David Hansemann was born in 1790 near Hamburg, Germany. He was the only one among his brothers not to attend university. Instead, he apprenticed himself to get business experience. He worked as a clerk for a textile and wool factory and in 1817, invested one thousand thaler from his savings to start a wholesale wool business of his own in Aachen.

??????????? Hansemann jumped from one business or civic project to another. He launched a fire insurance company in Aachen in 1824 and became a member of the city’s chamber of commerce and its commercial courts. In 1828, he was elected to Aachen’s city council. From 1835 to 1843, Hansemann was president of a railroad. He then worked on another railroad where he was involved in raising capital for the project from bankers in K?ln, perhaps his first such experience. In 1845, he also became a member of the provincial parliament.

Crisis Minister

??????????? In 1848, David Hansemann became finance minister of Prussia. In the post, he addressed a banking crisis that coincided with the political revolutions underway that year. The response entailed guaranteeing some of the liabilities of a failing bank, a guarantee that would last until 1857. Hansemann remained minister for just nine months before a change in government meant he was out of office and his political career over.

??????????? Still, Hansemann was nonetheless appointed to run the Preu?ische Bank or ‘Bank of Prussia’. This was an old bank that had essentially been reestablished as a new central bank for Prussia. Hansemann attempted to reorient the banking system to serve the commercial middle classes but achieved little. This was not what he was brought to the bank to do. After moving on from the Bank of Prussia, he looked to form a new bank for small businesses in Berlin, namely the city’s artisans and shopkeepers, particularly one that would serve them in tough times like 1848. Hansemann is believed to have been inspired by the Union de Crédit recently formed in Brussels. Berlin lacked such banks.

Establishing a New Bank

??????????? His request for a charter was initially turned down. Officially establishing a new corporation then was not straightforward, especially for a bank. Still, Hansemann was able to create Disconto-Gesellschaft. It was formed and began operations in 1851 as a simple partnership without a corporate charter. It was a partnership, rather than a corporation, in which only the limited partners had limited liability. These limited partners had the right to have their commercial bills monetized, or ‘discounted’, by the firm, making investments in the partnership popular among Berlin businessmen. Indeed, in its early history, it functioned like a cooperative, only serving the financing needs of its investors, which numbered 236.

??????????? From 1853, Disconto-Gesellschaft also placed bonds for railways alongside other banks, starting with a 5.375 million thaler issue of state-guaranteed bonds for the Moscow-Riazan Railway. The bank would market and sell many such railway bonds in the future. To increase its capacity to take on new business, Disconto-Gesellschaft began to issue public shares. Directors were still personally liable and the company was technically still a partnership, just one with a larger investor-base. In this plan, a further 50,000 shares of two hundred thaler each were issued in 1855. Thus, ten million thaler of shares were issued and were rapidly subscribed to by investors. With this capital, the bank could lend more and it changed its business plan to allow loans secured by longer-term annuities and shares, rather than bills alone. That said, growth was volatile.

??????????? Starting the next year, the pace in placements of railway bonds quickened. For this, the company was making a lot of money and paid a 10% dividend over just nine months in 1856. Disconto-Gesellschaft next planned to raise an additional ten million thaler but this was abandoned with a financial crisis in 1857. The firm made it through this crisis relatively unscathed, though the dividend was halved to 5% and would only very slowly recover over the subsequent decade. Its financial condition though was not any weaker and the bank’s surpluses increased.

??????????? By 1859, Hansemann’s firm was leading a bank syndicate formed to place a government loan with investors. Disconto-Gesellschaft placed loans for other German principalities, Baden and Bavaria, as well as municipal loans, in the following decade. In the 1860s, it would underwrite issuances of shares for companies in addition to arranging loans. It also became involved, from the 1870s onward, in businesses as far as away as Brazil and German colonies in the Pacific and Africa. Disconto-Gesellschaft had somehow become a leading German bank while skirting the requirements to officially become a bank.

Circumventing a Monopoly

??????????? In Prussia, banking was a relatively closed industry to entrepreneurs. The Bank of Prussia was given a special position and it succeeded in convincing governments not to allow too much competition. Disconto-Gesellschaft may have been allowed to operate without a banking charter but it was therefore unrecognized by the Bank of Prussia which would not advance money to the bank against bills.

???????????Still, Disconto-Gesellschaft was successful and prompted others to enter the banking business in Berlin. In 1856, efforts by two other investor groups to found banks were met with rejection by government officials. So, the banks were founded as partnerships as Hansemann’s firm was; these two were established this way in Berlin and others elsewhere. In any case, the old system was not to last. After the 1870s especially, the financial system in Prussia looked transformed, eventually dominated not by the Bank of Prussia but by what became known as the ‘D banks’, Deutsche Bank, Dresdner Bank, Darmst?dter Bank, and Disconto-Gesellschaft.

German Banking

??????????? Eventually, incorporation laws were liberalized which made it easier to found banks and easier to form limited liability corporations which became new clients of the new banks. In the 1880s and 1890s, the largest banks, like Disconto-Gesellschaft, became larger. In 1889, the deposits of German banks stood at 371 million marks (124 million of the old thaler) of which the deposits of Berlin-based banks were 131 million marks. By 1899, these sums had grown to 813 million and 338 million respectively.

??????????? German banks were formed, and grew, in the 19th century in response to the challenge of financing industry. Industrial ventures were risky so lending to them or placing their securities, which were usually long-term investments, with enough investors was challenging. Because capital raising was fundamental to these businesses and many lacked entrepreneurs who could pay sufficient attention to this difficult task, the banks were very involved in incubating industrial companies. This stands in stark contrast to banks in Britain, for example. There, banks were hardly interested in financing industry, focusing instead on trade finance and short-term financing that other businesses might need.

??????????? Disconto-Gesellschaft went so far as to establish a subsidiary in 1857, Heinrichshütte, dedicated to mining and smelting, which ended up being spun off after running large losses. It was later also financially involved in other loss-making industrial businesses, including a brewery and a compressed air and electric company. In the early-to-mid 1890s, it would write off approximately ten million marks in loans, principally to industrial companies. Such loss-making investments by banks in industrial firms was a common problem.

??????????? By contrast to the big ‘universal banks’, private banks were too small to serve big industrial firms. Though intent on serving industry from the start, Disconto-Gesellschaft focused initially on small businesses, lacking the capital to support larger firms. Eventually, it became one of the largest banks in the country. Deutsche Bank did grow larger in terms of assets but Disconto-Gesellschaft remained very important. The bank’s key clients in the early 1900s included operators of blast furnaces and flour mills and armaments companies. Disconto-Gesellschaft remained involved in emerging and sometimes faraway industries, like the petroleum business in Romania as early as 1903. Disconto-Gesellschaft eventually merged with Deutsche Bank in 1929.

Lesson

??????????? The liberalization of the banking system in Germany was perhaps overdue compared to the case of Britain and France. Nevertheless, in the end, the policy of the German government proved excessively restrictive and ultimately unsustainable. It has shown many times in history that the defense of unnatural monopolies, like that of the Bank of Prussia, is often difficult and fruitless. When liberalization came, there was pent up demand for banking services. Yet, the timing of this change meant that these banks looked different than their counterparts elsewhere, at least those in Britain, in their focus on industrial activity which was the most important capital-consuming economic sector at this time. The timing is relevant. If the banking system was liberalized a century earlier the banks might have emerged well suited to fund trade instead, and a century later, perhaps computer and software companies. ?

More from the Tontine Coffee-House

???????????Read?about Crédit Mobilier, an industrially-oriented French bank founded the year after Disconto-Gesellschaft, and small German savings banks, the sparkassen. Consider subscribing to this blog’s?newsletter?or checking out?book recommendations, which include many of the sources often referenced in my posts.?

Further Reading

1.????? Riesser, Jacob. “The German Great Banks and their Concentration in Connection with the Economic Development of Germany.” National Monetary Commission, Government Printing Office, 1911.

2.????? Guinnane, Timothy W. “Delegated Monitors, Large and Small: Germany’s Banking System, 1800–1914.” Journal of Economic Literature, vol. 40, no. 1, 2002, pp. 73–124.

3.????? Cassis, Youssef, and Philip L. Cottrell. Private Banking in Europe. 2015.

4.????? “‘But I consider wealth as a means only and not an end’: On the 150th anniversary of David Hansemann’s death.” Bank and History Historical Review: Historical Association of Deutsche Bank, Aug. 2014, pp. 1–8.