Page 185 - Global Political Economy_Understanding The International Economic Order

CHA PTER S EVEN
Banking-industry ties have reduced conflict between industrial and
financial interests over economic policy. Because of their pervasive
financial power and their linkage with key industries, the major Ger-
man banks play a central role in the governance of industry and in
overall strategic planning for the German economy. While the Ger-
man corporate world, like the Japanese, is closed, the German econ-
omy itself is open, and the German legal system and codified adminis-
trative procedures ensure that foreign businesses will be treated in a
legally fair manner.
The powerful influence of German universal banks over the econ-
omy is primarily a function of the considerable freedom the banks
enjoy to enter a great variety of business activities. Under the system
of universal banking, German banks can participate in almost every
conceivable financial activity, from commercial to investment to mer-
chant banking. Until the 1990s, American commercial and investment
banking, on the other hand, was restricted by the Glass-Steagal Act
of the early 1930s. In this system, different activities have been con-
ducted by different types of institutions, while German universal
banks have had a hand in almost every facet of German financial and
business affairs. For example, industrial financing is supplied princi-
pally through bank loans rather than through issuance of stock or
commercial paper. The banks also own large portions of German
companies, and the supervisory boards of German industry are fre-
quently dominated by bankers. Industrial firms prize their ties with
the banks because, in addition to ensuring lower cost capital, this
arrangement has provided security against hostile takeovers and inter-
fering shareholders.
The strategic role of banks and the close links between banks and
industry in the German economy are largely the result of Germany’s
experience as a late industrializer. As Alexander Gerschenkron, and
Thorstein Veblen before him, pointed out, the timing of industrializa-
tion is a key factor in determining the mechanism of capital accumu-
lation and the overall structure of a nation’s industrial system. 41 In
contrast to Great Britain and the United States, where capital was
initially accumulated largely in the hands of individual entrepreneurs,
in Germany and other continental European countries there was rela-
tively little capital in the hands of individuals. In these circumstances,
the banks became the principal means of amassing sufficiently huge
41
Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A
Book of Essays (Cambridge: BelknapPress of Harvard University Press, 1962); and
Thorstein Veblen, Imperial Germany and the Industrial Revolution (New York: Mac-
millan, 1915).
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