28. July 2023

Steffen Murau


Sovereign Debt Issuance and the Transformation of the Monetary Architecture in Prussia and the German Empire, 1740–1914

Steffen Murau

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This paper traces the transformation of the monetary architecture and concomitant sovereign debt issuance practices in Prussia and the German Empire from 1740 to 1914 in order to reflect on contemporary ideas regarding the appropriate relation between states’ treasuries, central banks, and the private banking system in matters of sovereign debt issuance. It discusses three institutions as “protagonists” — the Königlich Preußische Bank, the Seehandlung, and the Disconto-Gesellschaft — and follows them through four phases of Prussian and German history: feudal Prussia from Friedrich II to the defeat against Napoleon (1740–1806); from the Stein-Hardenberg reforms to the March Revolution (1807-1848); post-revolutionary Prussia, including the rise of Bismarck, his three wars, and the foundation of the German Empire (1849-1871); and Prussia in the German Empire during the first era of globalization (1871-1914). Adopting the Monetary Architecture framework as a conceptual lens, the analysis yields three main findings. First, off-balance-sheet fiscal agencies (OBFAs) have played a key role in the issuance and management of sovereign debt, even before central banks and treasuries in the modern sense had formed. This is highlighted in the institutional role of the Seehandlung, which kick-started Prussian sovereign debt issuance during the Napoleonic Wars. Second, central banking institutions have historically shifted within the public-private spectrum. The state-owned Königlich Preußische Bank became more functional and accountable after it was converted into the hybrid Preußische Bank. When it was transformed into the Reichsbank in 1875, a fully private ownership structure was chosen. Third, the economic liberalization after 1848 and the increased need to harness private funding for war finance led to the emergence of syndicated sovereign bond issuance. The Disconto-Gesellschaft, which played a leading role in the Prussia Consortium and the Imperial Bond Consortium, was at the forefront of establishing a new relationship between private finance and the state. 

Why did we commission this paper?

Germany has a rich and mixed history of public finance. In this history, both its current preoccupation with low debt-to-GDP ratios and the turbulent mid-20th century period with four sovereign defaults between 1924 and 1945 are well known. Less well known, however, is the fiscal history of German-speaking states prior to the 20th century. Given that the 19th century saw a customs union, a political union, and a monetary union emerge among those states under Prussian leadership, all in a context of intense geopolitical competition and rapid structural changes to the economy, we suspected that a deeper understanding could provide useful context for our own historical moment. We also suspected that a deep dive into the 18th and 19th centuries would show a greater variety of macro-financial arrangements than we are familiar with today. By reminding ourselves of this variety, by studying what did and did not work, and by showing that it was Prussia of all places that experimented with different public debt arrangements, we aim to make space for a more open-minded discussion of public debt and fiscal policy today.

What did we learn?

Steffen Murau’s paper provided us with a wealth of insight. Besides demonstrating how colourful Prussia’s and imperial Germany’s macro-financial history is, three lessons crystallised for us.

First, off-balance sheet fiscal agencies (OBFAs) were a normal part of that architecture, especially whenever fiscal policy was constrained by debt brakes or other obstacles to sovereign debt issuance, as was the case for Prussia between 1820 and 1850 and again between 1860 and 1866. Their use goes back further than we originally thought and was more frequent and extensive than we had suspected. It was particularly striking in the context of high-priority state projects, whether roads, railways, and canals, the construction of urban infrastructure to accommodate a rapid influx of population, or – of high relevance, given the 19th century’s many wars – military spending. OBFAs, and especially Prussia’s Seehandlung, enabled those projects to go ahead despite a fiscal order that sought to constrain their funding to taxation and other current sources.

Second, the effectiveness of Prussia’s central bank – first the Königlich Preußische Bank, then the Preußische Bank, which eventually transformed into the Reichsbank — was more mixed than we originally thought. During its “public” – at that point royal – phases, where it had no private shareholders, it did not stabilise financial markets or support sovereign debt issuance effectively. Once it had settled into a more hybrid institutional structure, involving private shareholders, it became more effective. Interestingly, in the period up to 1914, the Reichsbank regularly bought significant parts of sovereign bond issuances, as did the Seehandlung, while Germany did not experience any major adverse effects on inflation or confidence in public debt.

Finally, the consequences of changes in the private sector’s institutional role were surprising. When major private banks played a more important institutional role in sovereign bonds issuances, via the Prussia Consortium and the Imperial Bond Consortium, this extended the volume of debt that could be issued and funded. Rather than disciplining debt issuance, they crowded in other private investors, highlighting the importance of trust between the state, banks, and the holders of private capital.

Erratum: On page 3 we changed the year “1924” to “1923” and uploaded a new version on 15.02.2024.

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