Existing work on the German financial system pays little attention to the securities markets in the pre–World War I era, in large part due to an assumption that these markets played hardly any role in the development of German industry at that time. Moreover, most modern research on comparative financial systems has viewed markets and banks as substitutes rather than complements and has assumed that markets embedded in universal systems naturally languish or perform poorly. This chapter sets the record straight by examining the origins of German securities markets, as well as their regulation, microstructure, and efficiency in the pre–World War I era. The results indicate that the German financial system of that era supported large and vibrant securities markets that performed very well, even by contemporary American standards. Supporting the previous chapters' findings on the close connections between bank relationships and stock market listings, this chapter argues that the universal banks and stock markets maintained a symbiotic relationship, producing a corporate financial system that combined large, universal banks with active markets. This prominent historical example casts significant doubt on the traditional dichotomy drawn between banks and markets.

BACKGROUND ON STOCK MARKET REGULATION AND COMPANY LAW

The German financial system has frequently been described as fundamentally bank-centered; one in which the financing of industry flows primarily through banks, to the exclusion of securities markets.