the world of private banking
the world of private banking
the world of private banking
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164<br />
THE WORLD OF PRIVAtE BANKING<br />
1830s business in general slackened, local investors were no longer prepared to<br />
fund such a risky venture. In 1839, Oppenheim held about three quarters <strong>of</strong> <strong>the</strong><br />
company’s stock. The bulk <strong>of</strong> this was funded by <strong>the</strong> bank’s own resources, while<br />
only a small portion was deposited on behalf <strong>of</strong> <strong>the</strong> bank’s customers. 17<br />
Although <strong>the</strong> bank’s resources consisted largely <strong>of</strong> <strong>the</strong> proprietors’ personal<br />
capital, <strong>the</strong> liquidity position <strong>of</strong> <strong>the</strong> bank became dangerously strained, since at<br />
<strong>the</strong> same time <strong>the</strong> not-yet-opened railway was facing <strong>the</strong> same difficulties. When<br />
<strong>the</strong> cost estimate proved to be insufficient, <strong>the</strong> depression <strong>of</strong> <strong>the</strong> late 1830s (plus<br />
seemingly hostile Prussian railway legislation) from <strong>the</strong> outset made every effort<br />
to raise additional finance through <strong>the</strong> market a lost cause. Since <strong>the</strong> Prussian State<br />
was also very reluctant to support <strong>the</strong> company, it relied heavily on its bankers. In<br />
1838 a consortium consisting <strong>of</strong> Oppenheim, Stein and Herstatt agreed to pay for<br />
<strong>the</strong> total <strong>of</strong> a new stock issue <strong>of</strong> 1.5 million thalers. Yet downward price movements<br />
<strong>of</strong> stock soon rendered <strong>the</strong> shares held by <strong>the</strong> banks unsaleable, and <strong>the</strong> ‘lock-up’<br />
<strong>of</strong> <strong>the</strong> bankers’ resources posed a serious threat to <strong>the</strong> latters’ solvency. By <strong>the</strong> end<br />
<strong>of</strong> 1838 <strong>the</strong> bankers urged <strong>the</strong> board <strong>of</strong> directors to repurchase a substantial part<br />
<strong>of</strong> <strong>the</strong> company’s stock in order to stabilize <strong>the</strong> price. At first <strong>the</strong> directors were<br />
very restrained, hiding <strong>the</strong>mselves behind <strong>the</strong> argument that <strong>the</strong> company statutes<br />
did not allow such manipulation. Finally, however, when <strong>the</strong> bankers threatened<br />
to unload <strong>the</strong>ir holdings <strong>of</strong> stock completely and without regard to <strong>the</strong> losses<br />
involved, <strong>the</strong> directors agreed to take back <strong>the</strong> whole issue <strong>of</strong> 1.5 million thalers.<br />
The price which <strong>the</strong> bankers had to pay for this concession was <strong>the</strong> stipulation<br />
that <strong>the</strong>y lost <strong>the</strong> whole amount <strong>of</strong> calls already paid (20 per cent) if <strong>the</strong> shares<br />
were kept in <strong>the</strong> hands <strong>of</strong> <strong>the</strong> company until mid-1839. Later, <strong>the</strong> period was<br />
prolonged until <strong>the</strong> end <strong>of</strong> that year, but <strong>the</strong> situation did not ease. In order to<br />
make sure that <strong>the</strong> Rhenish Railway was connected to <strong>the</strong> Belgian State Railway,<br />
<strong>the</strong> Belgian government finally agreed to pay for <strong>the</strong> stock before <strong>the</strong> bankers had<br />
to write <strong>of</strong>f <strong>the</strong>ir calls. 18<br />
It is pointless to speculate about <strong>the</strong> outcome <strong>of</strong> <strong>the</strong> crisis if <strong>the</strong> negotiation<br />
with <strong>the</strong> Belgian government had failed, but it is quite clear from this case that a<br />
banker having realized <strong>the</strong> potential <strong>of</strong> this new venture had to invest an extremely<br />
high portion <strong>of</strong> his own resources. He could not rely on an anonymous capital<br />
market, but had to resort to <strong>private</strong> contact with <strong>the</strong> limited circle <strong>of</strong> his wealthy<br />
clients. As a consequence, <strong>the</strong> fate <strong>of</strong> <strong>the</strong> banker was intertwined with that <strong>of</strong> his<br />
industrial customers. Some banks, particularly those which had options o<strong>the</strong>r than<br />
industrial credits, decided to avoid such risk and to retreat from this business. An<br />
outstanding example is <strong>the</strong> Berlin bank Mendelssohn & Co. This bank, which had<br />
been both a first-rank State financier and an active ‘railway bank’, got into trouble<br />
from its involvement in <strong>the</strong> Cuxhafen-Stade Railway Company in 1875. As an<br />
emergency measure <strong>the</strong> Mendelssohns sold <strong>the</strong>ir entire interest in industrial and<br />
17<br />
Teichmann, ‘Bankhaus’, p. 13.<br />
18<br />
Stürmer et al., Wägen, p. 88.