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getting in turn their board representation. First joint-stock banks became capable to deploy
great amounts of capital needed by new industries. In 1876 Germany’s central bank, the
Reichsbank, had been set up with a monopoly on issuing notes. Beside, through the extensive
branch network it provided payments facilities and short-term business loans. The big banks
tended to focus on providing capital for industrial expansion. By the early 20 th century the
German economy was characterized by big corporations financed by a small group of large and
influential banks. With growing power of left-winged ideas, opposition to the concentration of
business into banking cartels started to be criticized. World War I not only stopped prospective
of banking reform, but also transformed Germany’s economic and financial position. Unfolding
hyperinflation drastically weakened the banks, reducing their capital to less than a third of its
pre-war level (in real terms). After the restoration they were in no position to withstand the
new banking crisis started with Credit-Anstalt in Vienna in May 1931 and soon spread to
Germany. In its aftermath, the authorities decided of creation of a government-controlled
banking cartel with limits on interest rates and restrictions on opening new branches. The
banks were reprivatized in 1936, but under the Nazi regime they remained servants of the
state. The arrival of the Americans in 1945 banking cartels that was regarded as the economic
backbone of military industry had been decomposed. The three big Berlin banks were split up
into ten constituent parts. This explained why they were not legally required to give up
universal banking. (By contrast in Japan, a version of the Glass–Steagall Act was imposed). The
advent of the Cold War weakened a pressure on remodeling Germans economy on American
style. In 1957 subdivisions of the big banks were allowed to reconstitute themselves as
nationwide universal banks. For years, the dominance of universal banks had been a key issue
of public debate. In 1974 the Gessler Commission was set up to investigate the banking system.
In concluding remarks of the report authors announced: “The universal banking system has
proved its worth. Deficiencies of the current banking system are not sufficient to necessitate a
change of system. A transition to a system based on separation might be able to eliminate the
kinds of conflict of interest which exist within the universal banking system. However, major
structural change of this nature would have such detrimental effects that it can ultimately not
be justified.” *Busch 2008+ The only reform proposed was a 25 percent limit on shareholdings in
non-financial companies. Another, long term impact of the report was, that by the late 1990s
most banks had started to divest their corporate shareholdings and reduce their directorships.
Not even the 2008 financial crisis succeeded in igniting an animated debate in Germany about
the separation of commercial and investment banking.
The case of the United Kingdom
By the 19th century the UK’s financial system comprised of small “country” banks offering
banking facilities to the areas of the country, and London-based merchant (investment) banks
that focused primarily on trade finance and the placement of government bonds. Because of
their small size the country banks were fragile and vulnerable to banking crises. In the wake of
the crisis 1825, joint-stock banking was allowed so that banks could raise more capital.
However, the shareholders of the new joint-stock banks still had unlimited liability, stopping
them from excessive risk taking. The advent of limited-liability banking (after 1878) was
followed by a wave of consolidation, so that by the early 20 th century Britain was dominated by
a small number of nationwide banks confined to commercial banking. In the meantime Britain’s
economy had plenty of time to develop efficient capital markets with specialist investment
banks. Ultimately there was no need for commercial banks to get involved in securities
activities. By the World War I banks in Britain became world’s biggest. Once it had consolidated
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