The blackmail began in March in Aalen, a town in the southern German state of Baden-Württemberg, where the boy lives.
A 12-year-old bully threatened to send his older brother to attack the 10-year-old victim unless he brought him some cash.
A police spokesman told The Daily Telegraph
: "Because the older brother is known not to be a softie, the boy was really frightened and always delivered the money."
Two other boys were involved in blackmailing the younger child. One demanded “protection money”, while a third demanded money to keep quiet about the whole business.
Police are claiming the bullies did not act as a group, but were all blackmailing the younger boy individually. They did not go to the same school together, but lived near each other.
The spokesman said: "The victim's parents kept large amounts of cash at home. It is difficult to imagine, but the parents did not notice the disappearance of the money."
Because the bullies are only 11 and 12-years old, they cannot be charged with a crime since they are under the legal age of responsibility.
Only a small amount of the money was recovered. Most of the cash was reportedly spent on clothes and computer games.