Banking

by William Amasa Scott

These associations were governed by the members through a general assembly, representative boards, and elected officers, and were supervised by the state and carefully regulated by law. Regulations were carefully worked out pertaining to the ratio that the loan should bear to the value of the estate mortgaged, methods of valuation, ways and means of maintaining an equilibrium between the bonds issued and the mortgages held, the treatment of defaulting members, etc., etc. Machinery for the sale of the mortgage bonds delivered to members was also created, and in some cases later on these sales were made directly by the associations themselves, and cash paid to the maker of the mortgages.

Five of these original Landschaften have continued to the present day, and others modeled after them were subsequently established. In 1909 in all Germany twenty-five were in operation, of which eighteen were in Prussia. The newer ones have not in all respects followed their models. Unlike the original five, membership in them is not limited to the nobility and is not compulsory; the liability of the members for the payment of the bonds issued has in some cases been limited to a percentage of the total; the loans are usually paid in cash; and the bonds are sold directly by the associations; but the principles of mutual liability and mutual control which were basic in the old organizations have not been violated in any case. Both old and new are organized in the interests of borrowers on real estate mortgage security, and aim to secure funds for these on the lowest possible terms and for long periods of time, by making the security offered the lenders greater than any single borrower could supply.

The degree of their success is indicated by the fact that in 1909 the amount of their outstanding mortgage loans amounted to nearly a billion dollars, and that their mortgage bonds rank on the exchanges with Prussian state bonds and have at times outranked them.

Another type of land bank appeared in the early part of the nineteenth century as a result of the movement for the freeing of the serfs and their transformation into freehold peasants. The lands of these cultivators were burdened with a variety of feudal dues and charges which had to be commuted before they could become freeholds. In order to facilitate this process banks were established which assumed the obligations of a peasant towards his feudal superior in return for a mortgage on his holding, repayable with interest in the form of an annuity, and in amount equal to the sum to be paid to the feudal superior for the total extinguishment of all feudal obligations.

Some of these banks were established and administered by states, provinces, and communes, and some by private parties. The public ones obtained the funds they needed partly from subsidies and partly from the sale of guaranteed mortgage bonds and the private ones wholly from the sale of mortgage bonds.

The completion of the work for which these banks were originally established put an end to their development about 1883, but similar institutions have since been established in Prussia to assist colonists in the purchase and equipment of their farms, and in central and western Germany to promote general agricultural and urban real estate operations. The colonists sent into Poland for the Germanization of that province were in this way assisted by the Prussian government, and in some parts of Germany the same means have been employed for the purpose of aiding in the process of breaking up large estates into small holdings, in the construction of dikes, roads, and reservoirs, and in changing the courses of streams.

Next to the Landschaften the most important intermediaries between capitalists and investors in real estate in Germany are the so-called Hypothekenaktienbanken, or joint-stock mortgage banks. These are private corporations, capitalized by the sale of stock shares to the general public, and controlled by their stockholders through directorates, like industrial corporations the world over. Their business is the making of long-period loans on real estate security, and the funds thus employed are obtained by the sale of mortgage bonds secured by the real estate mortgages in which the proceeds are invested and by their own capital, surplus, and other funds.

They differ from the Landschaften in that they are not cooperative or mutual institutions, but strictly business enterprises run in the interests of their stockholders. Their primary aim is to earn dividends rather than to secure the lowest possible loan rates and other favorable terms for borrowers. As a matter of fact they are forced by competition and by the principles of good business to make loans at reasonable rates and on favorable terms regarding repayment and other matters, and they successfully compete with the Landschaften and other cooperative credit institutions of Germany. Their mortgage loans are usually made repayable on the annuity plan, one-half per cent each year being the common rate of payment, and they loan about the same percentage of the value of the lands mortgaged, as do the Landschaften and other land banks, and the rate of interest charged is the market rate, into the determination of which, of course, the competition of all other institutions enter.

While these institutions loan in the aggregate enormous sums on farm property, their chief field of operations is urban real estate, and particularly the industry of residence, or as we would call it in this country, apartment-house construction. It is on this account that the period of their most rapid development coincides with that of the recent rapid industrial and commercial development of Germany, which dates back only to the establishment of the Empire in 1870. Most of them began operations in the decade 1862-1872, but the most rapid growth in the magnitude and scope of their business operations has come in recent years.

In 1899 there were forty institutions of this kind in operation in the German Empire. The number at the present time is probably considerably greater, since for obvious reasons combinations among them are not promoted by the same kind of economic pressure that in recent years has operated so efficiently in Germany in the field of commercial banking.