Close relationships between universal banks and industrial companies are widely regarded as a distinctive feature of the German economy. Underlying this view is the belief that the German system of investment finance has institutional features which are the best way of dealing with the problems of asymmetric information that are inevitable when investment is financed by external sources of funds. In Discussion Paper No. 1171, Research Fellow Jeremy Edwards and Sheilagh Ogilvie address the fundamental premise of this view that German institutional arrangements for financing industrial investment have been superior to those in other countries. The authors ask whether it is correct to describe the German system of investment finance in the nineteenth and early twentieth century as being one dominated by universal banks with close ties to industrial companies, and which in turn facilitated German industrialization by providing large amounts of external finance.

The paper argues that the role of universal banks in German industrialization has been over-emphasized. The contribution of universal banks to the financing of railway investment was overshadowed by that of the German states. The distinctive features of the relationship between universal banks and industrial firms apply only to industrial joint stock companies, but the vast majority of the industrial capital stock in Germany before 1914 was accounted for by firms which were not joint stock companies. Even for industrial joint stock companies, careful analysis of the relationship between these companies and universal banks casts serious doubt on the conventional view of this relationship.

Universal Banks and German Industrialization: A Reappraisal
Jeremy Edwards and Sheilagh Ogilvie

Discussion Paper No. 1171, May 1995 (FE)