Bank Securities Holdings and Industrial Finance Before World War I: Britain and Germany Compared

Abstract

Orthodox paradigms hold that through direct involvement with firms, the German universal banks funneled substantial amounts of financial capital into industry during the half century before World War I. At the same time, by avoiding such engagement with industrial companies, British banks are thought to have disadvantaged that country's economy with respect to its continental and American competitors. Using balance sheet data for the British deposit banks and the German universal banks, this paper shows that the German and British banks held approximately the same proportion of their assets in the form of non-government securities. In addition, the paper uses details garnered from two of the largest German banks to demonstrate that the universal banks became directly involved in only a few companies, that the total of these equity holdings amounted to a small share of bank assets, and that often the shares remained on the banks' books only because of an insufficient market for new issues. Thus, the idea that the German universal banks purposely took long-term stakes in industrial companies in order to credibly commit to behaving in the long-run interest of the firms finds limited support from this analysis.