This study of the reform of the German Bourse Law in 1908 argues that the “self-undermining negative policy feedback effects” of the initial Bourse Law of 1896 on the market for Imperial and state bonds explain why exchange regulation was liberalized although the dominant political forces, the Conservatives and the Clericals, were opposed to bourses and capital markets. Based on an original assessment of primary documents, the study uses the method of explaining-outcome process tracing to show that the initial Bourse Law caused losses to the Imperial government and the large banks; this induced both actors to remove the prohibition of speculation. Because the German Empire can be viewed as a kind of laboratory for (first) treatment effects on financial market regulation of the sovereign debt market, this study contains lessons for understanding the relationship between states and financial markets in general.
6 Appendix of quotes on the Bourse Law of 1908
Baron (Freiherr von) Berlepsch, Authorized Representative to the Federal Council of the Kingdom of Prussia and State Minister and Minister for Trade and Commerce, emphasized that the Allied Governments (Verbündete Regierungen) favoured the recommendations of the Exchange-Committee of Enquiry; he claimed that futures trading has more advantages than disadvantages and that it should be regulated but not prohibited. Likewise Rothe, Authorized Representative to the Federal Council and deputy secretary at the Imperial Office of the Interior, pointed out that the general prohibition on futures trading was like a “sword“ which would harm the German economy because it ran against the general trend of increasingly internationalized capital markets.
In its annual report of 1903 (Geschäftsjahr 1903), the Dresdner Bank reported that “Unfortunately, it is no longer possible to make profits through dealing in domestic state and municipal bonds due to the extreme competition between the different financial syndicates; rather the issuance is almost a loss-making business.”
In September 1900 the Frankfurt Chamber of Commerce submitted to the Prussian government a petition demanding the abolition of the Bourse Law due to its harmful effects. The chamber maintained that the prohibition of futures trading as well as the bourse register led to a “narrowing and shrinking of the market” through which the “issuance of new state bonds is very unfavourably affected”; it argued that despite the “excellent quality” of the German state bonds their prices were lower than those of foreign states. Likewise the Eldest of the Merchants of Berlin claimed in its statement to the Prussian government that the prohibition of the futures trading harmed the prices of public bonds. Other chambers, as well as the Plenary Meeting of the German Trading Day (Vollversammlung des Deutschen Handelstages), followed suit.
The Federal Council claimed that “It should not go unmentioned that the proposed rules do have major importance for increasing the prices of the German Imperial and state bonds. Before the 1896 Bourse Law these bonds were preferred as collateral in speculative activities. The introduction of the Bourse Law abolished this use so that speculation triggered the selling of public bonds in order immediately to use the profits to buy shares instead of new acquisitions of bonds. Such a narrowing of the market must necessarily negatively affect the prices.”
Dr. Semler, National Liberal Party, maintained: “Only with the help of a strong exchange would it be possible to place bonds and treasury bonds in the huge numbers which would be necessary. A strong bourse is a mighty confederate; a weak bourse offers the enemy an unprotected side.”
Kaempf (Free-Thinking Party) said that “The financial reform [he meant the Bourse Law reform] and the creation of a balanced budget are closely linked with the bourse question. The price of our state bonds is fixed at the exchanges and when our bonds have a low price then this affects the credit of the whole country and if the credit of the whole country is suffering, then you cannot expect that our economy will prosper in the long run. The flaw must be removed, so that the price of our state bonds is higher than before.”
I thank Agnes Orban and Carsten Burhop for their insights and Michael Kemmerling for his research assistance.
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