America's Money Machine

52 PART I I THE ROOTS OF REFORM
dard. The acts permitted coinage for individuals, or what is known as free
coinage, subject only to the mint charges or brassage, and provided for
the gradual retirement of the circulating notes outstanding. The note
issue was gradually to be concentrated in the Reichsbank, a new institution
that· took over the charter of the Prussian state bank.
What was unique in the German system was the allowance of a note
issue secured by "good commercial bills," as the act described them,
provided that the bank held in vault cash equal to one third of the notes
issued. A limit was also placed upon the total amount of such notes that
could be issued, and the bank would be taxed at the rate of 5 per cent
per annum on the amount ofnotes issued in excess ofthis maximum. The
theory of this was that in times of financial emergency, additional. notes
could be issued to prevent a monetary stringency, but because of the tax
to which they would be subject, there would be every incentive to reduce
the amount the moment the emergency had passed.
A limit of 385 million marks was prescribed for the total free, or
nontaxable, notes that could be issued, ofwhich 250 million marks were
assigned to the Reichsbank and the balance allocated among the various
banks whose charters still permitted them to issue notes.*
Not unexpectedly, the amount of the "contingent" issue was enlarged
periodically, and by 1910 it had been increased to 618 million marks,
most of which was by now concentrated under the note issue power of
,the Reichsbank.
Nevertheless, at the time of the Panic of 1907 German currency enjoyed
a prestige rivalled only by English sterling, and was actually more
strongly fortified with gold than the English pound.
*In addition, of course, the banks could issue circulating notes secured 100 per cent by
coin. These would be in the nature of warehouse receipts for gold and silver. It is the
"fiduciary" or "contingent" issues with which we are concerned here.