Economic history of Germany

Lübeck, 15th century

Cologne around 1411

Total population estimates of the German territories range around 5 to 6 million by the end of Henry III's reign in 1056 and about 7 to 8 million after Friedrich Barbarossa's rule in 1190.[12][13] The vast majority were farmers, typically in a state of serfdom under the control of nobles and monasteries.[14] Towns gradually emerged and in the 12th century many new cities were founded along the trading routes and near imperial strongholds and castles. The towns were subjected to the municipal legal system. Cities such as Cologne, that had acquired the status of Imperial Free Cities, were no longer answerable to the local landlords or bishops, but immediate subjects of the Emperor and enjoyed greater commercial and legal liberties.[15] The towns were ruled by a council of the - usually mercantile - elite, the patricians. Craftsmen formed guilds, governed by strict rules, which sought to obtain control of the towns; a few were open to women. Society had diversified, but was divided into sharply demarcated classes of the clergy, physicians, merchants, various guilds of artisans, unskilled day labourers and peasants. Full citizenship was not available to paupers. Political tensions arose from issues of taxation, public spending, regulation of business, and market supervision, as well as the limits of corporate autonomy.[16] Cologne's central location on the Rhine river placed it at the intersection of the major trade routes between east and west and was the basis of Cologne's growth.[17] The economic structures of medieval and early modern Cologne were characterized by the city's status as a major harbor and transport hub upon the Rhine. It was governed by its burghers.[18]

Main trading routes of the Hanseatic League

Jacob Fugger (right) and his accountant M. Schwarz

The Hanseatic League was a commercial and defensive alliance of the merchant guilds of towns and cities in northern and central Europe, that dominated marine trade in the Baltic Sea, the North Sea and along the connected navigable rivers during the Late Middle Ages ( 12th to 15th centuries ). Each of the affiliated cities retained the legal system of its sovereign and, with the exception of the Free imperial cities, had only a limited degree of political autonomy.[19] Beginning with an agreement of the cities of Lübeck and Hamburg, guilds cooperated in order to strengthen and combine their economic assets, like securing trading routes and tax privileges, to control prices and better protect and market their local commodities. Important centers of commerce within the empire, such as Cologne on the Rhine river and Bremen on the North Sea joined the union, which resulted in greater diplomatic esteem.[20] Recognized by the various regional princes for the great economic potential, favorable charters for, often exclusive, commercial operations were granted.[21] During its zenith the alliance maintained trading posts and kontors in virtually all cities between London and Edinburgh in the west to Novgorod in the east and Bergen in Norway. By the late 14th century the powerful league enforced its interests with military means, if necessary. This culminated in a war with the sovereign Kingdom of Denmark from 1361 to 1370. Principal city of the Hanseatic League remained Lübeck, where in 1356 the first general diet was held and its official structure was announced. The league declined after 1450 due to a number of factors, such as the 15th-century crisis, the territorial lords' shifting policies towards greater commercial control, the silver crisis and marginalization in the wider Eurasian trade network, among others.[22][23]

Between 1347 and 1351 Germany and Europe were haunted by the most severe outbreak of the Black Death pandemic. Estimated to have caused the abrupt death of 30 to 60% of Europe's population, it led to widespread social and economic disruption and deep religious disaffection and fanaticism. Minority groups, and Jews in particular were blamed, singled out and attacked. As a consequence, many Jews fled and resettled in Eastern Europe. The death of large parts of the popilation caused a major collapse of the labour force. Human power became a rare commodity and the social and economic situation of average workers improved for several decades as employers were forced to pay higher wages.[24][25]

The early-modern European society gradually developed after the disasters of the 14th century as religious obedience and political loyalties declined in the wake of the Great Plague, the schism of the Church and prolonged dynastic wars. The rise of the cities and the emergence of the new burgher class eroded the societal, legal and economic order of feudalism.[26] The commercial enterprises of the mercantile patriciate family of the Fuggers of Augsburg generated unprecedented financial means. As financiers to both the leading ecclesiastical and secular rulers, the Fuggers fundamentally influenced the political affairs in the empire during the 15th and 16th century.[27] The increasingly money based economy also provoked social discontent among knights and peasants and predatory "robber knights" became common. The knightly classes had traditionally established their monopoly through warfare and military skill. However, the shift to practical mercenary infantry armies and military-technical advances led to a marginalization of heavy cavalry.[28][29]

The Thirty Years' War (1618–1648) was ruinous to the twenty million civilians and set back the economy for generations, as marauding armies burned and destroyed what they could not seize. The fighting often was out of control, with marauding bands of hundreds or thousands of starving soldiers spreading plague, plunder, and murder. The armies that were under control moved back and forth across the countryside year after year, levying heavy taxes on cities, and seizing the animals and food stocks of the peasants without payment. The enormous social disruption over three decades caused a dramatic decline in population because of killings, disease, crop failures, declining birth rates and random destruction, and the emigration of terrified people. One estimate shows a 38% drop from 16 million people in 1618 to 10 million by 1650, while another shows "only" a 20% drop from 20 million to 16 million. The Altmark and Württemberg regions were especially hard hit. It took generations for Germany to fully recover.[33]

According to John Gagliardo, the recovery period lasted for about fifty years until the end of the century and was over by the 1700s. At that time, Germany probably had reached its pre-war population (though this is disputed). Then, there was a period of steady though quite slow growth to the 1740s. Afterward came a period of rapid but not exceptional economic expansion, that mainly occurred in the great states in the east (Austria, Saxony, Prussia) rather than in the small states of central or south Germany.[34]

Peasants continued to center their lives in the village, where they were members of a corporate body and help manage the community resources and monitor the community life. Across Germany and especially in the east, they were serfs who were bound permanently to parcels of land.[35] In most of Germany, farming was handled by tenant farmers who paid rents and obligatory services to the landlord, who was typically a nobleman.[36] Peasant leaders supervised the fields and ditches and grazing rights, maintained public order and morals, and supported a village court which handled minor offenses. Within the family, the patriarch made all the decisions, and tried to arrange advantageous marriages for his children. Much of the villages' communal life centered around church services and holy days. In Prussia, the peasants drew lots to choose conscription required by the army. The noblemen handled external relationships and politics for the villages under their control, and were not typically involved in daily activities or decisions.[37][38]

The emancipation of the serfs came in 1770-1830, beginning with then Danish Schleswig in 1780. Prussia abolished serfdom with the October Edict of 1807, which upgraded the personal legal status of the peasantry and gave them the chance to purchase for cash part of the lands they were working. They could also sell the land they already owned. The edict applied to all peasants whose holdings were above a certain size, and included both Crown lands and noble estates. The peasants were freed from the obligation of personal services to the lord and annual dues. A bank was set up so that landowner could borrow government money to buy land from peasants (the peasants were not allowed to use it to borrow money to buy land until 1850). The result was that the large landowners obtained larger estates, and many peasant became landless tenants, or moved to the cities or to America. The other German states imitated Prussia after 1815. In sharp contrast to the violence that characterized land reform in the French Revolution, Germany handled it peacefully. In Schleswig the peasants, who had been influenced by the Enlightenment, played an active role; elsewhere they were largely passive. Indeed, for most peasants, customs and traditions continued largely unchanged, including the old habits of deference to the nobles whose legal authority remained quite strong over the villagers. Although the peasants were no longer tied to the same land like serfs had been, the old paternalistic relationship in East Prussia lasted into the 20th century.[39]

The north German states were for the most part richer in natural resources than the southern states. They had vast agricultural tracts from Schleswig-Holstein in the west through Prussia in the east. They also had coal and iron in the Ruhr Valley. Through the practice of primogeniture, widely followed in northern Germany, large estates and fortunes grew. So did close relations between the owners and local as well as national governments.

The south German states were relatively poor in natural resources and those Germans therefore engaged more often in small economic enterprises. They also had no primogeniture rule but subdivided the land among several offspring, leading those offspring to remain in their native towns but not fully able to support themselves from their small parcels of land. The south German states, therefore, fostered cottage industries, crafts, and a more independent and self-reliant spirit less closely linked to the government.

Historical coalfields of Western Germany, Belgium, The Netherlands and Northern France

The first important mines appeared in the 1750s, in the valleys of the rivers Ruhr, Inde and Wurm where coal seams outcropped and horizontal adit mining was possible. In 1782 the Krupp family began operations near Essen. After 1815 entrepreneurs in the Ruhr Area, which then became part of Prussia, took advantage of the tariff zone (Zollverein) to open new mines and associated iron smelters. New railroads were built by British engineers around 1850. Numerous small industrial centres sprang up, focused on ironworks, using local coal. The iron and steel works typically bought mines and erected coking ovens to supply their own requirements in coke and gas. These integrated coal-iron firms ("Huettenzechen") became numerous after 1854; after 1900 they became mixed firms called "Konzern."

The output of an average mine in 1850 was about 8,500 short tons; its employment about 64. By 1900, this output had risen to 280,000 and employment to about 1,400.[43] Total Ruhr coal output rose from 2.0 million short tons in 1850 to 22 in 1880, 60 in 1900, and 114 in 1913, on the verge of war. In 1932 output was down to 73 million short tons, growing to 130 in 1940. Output peaked in 1957 (at 123 million), declining to 78 million short tons in 1974.[44] By the end of 2010, only five coal mines were producing in Germany.

The miners in the Ruhr region were divided by ethnicity (Germans and Poles) and religion (Protestants and Catholics). Mobility in and out of the mining camps to nearby industrial areas was high. The miners split into several unions, with an affiliation to a political party. As a result, the socialist union (affiliated with the Social Democratic Party) competed with Catholic and Communist unions until 1933, when the Nazis took over all of them. After 1945 the socialists came to the fore.[45]

German banks played central roles in financing German industry. Different banks formed cartels in different industries. Cartel contracts were accepted as legal and binding by German courts although they were held to be illegal in Britain and the United States.

The process of cartelization began slowly, but the cartel movement took hold after 1873 in the economic depression that followed the postunification speculative bubble. It began in heavy industry and spread throughout other industries. By 1900 there were 275 cartels in operation; by 1908, over 500. By some estimates, different cartel arrangements may have numbered in the thousands at different times, but many German companies stayed outside the cartels because they did not welcome the restrictions that membership imposed.

The government played a powerful role in the industrialization of the German Empire founded by Otto von Bismarck in 1871 during a period known as the Second Industrial Revolution. It supported not only heavy industry but also crafts and trades because it wanted to maintain prosperity in all parts of the empire. Even where the national government did not act, the highly autonomous regional and local governments supported their own industries. Each state tried to be as self-sufficient as possible. The beginning of rapid industrialization also gave rise to the period of “integration”, in the Foreign Direct Investment made by the German companies. One of the main justifications was the growing competition among local enterprises, especially in the newly emerging industries.[46]

Despite the several ups and downs of prosperity and depression that marked the first decades of the German Empire, the ultimate wealth of the empire proved immense. German aristocrats, landowners, bankers, and producers created what might be termed the first German economic miracle, the turn-of-the-century surge in German industry and commerce during which bankers, industrialists, mercantilists, the military, and the monarchy joined forces.

Germany's middle class, based in the cities, grew exponentially, but it never gained the political power it had in France, Britain or the United States. The Association of German Women's Organizations (BDF) was established in 1894 to encompass the proliferating women's organizations that had sprung up since the 1860s. From the beginning the BDF was a bourgeois organization, its members working toward equality with men in such areas as education, financial opportunities, and political life. Working-class women were not welcome; they were organized by the Socialists.[47]

Bismarck built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s he introduced old age pensions, accident insurance, medical care and unemployment insurance that formed the basis of the modern European welfare state. His paternalistic programs won the support of German industry because its goals were to win the support of the working classes for the Empire and reduce the outflow of immigrants to America, where wages were higher, but welfare did not exist.[48] Bismarck further won the support of both industry and skilled workers by his high tariff policies, which protected profits and wages from American competition, although they alienated the liberal intellectuals who wanted free trade.[49]

Political disunity of three dozen states and a pervasive conservatism made it difficult to build railways in the 1830s. However, by the 1840s, trunk lines did link the major cities; each German state was responsible for the lines within its own borders. Economist Friedrich List summed up the advantages to be derived from the development of the railway system in 1841:

• as a means of national defence, it facilitates the concentration, distribution and direction of the army.
• It is a means to the improvement of the culture of the nation…. It brings talent, knowledge and skill of every kind readily to market.
• It secures the community against dearth and famine, and against excessive fluctuation in the prices of the necessaries of life.
• It promotes the spirit of the nation, as it has a tendency to destroy the Philistine spirit arising from isolation and provincial prejudice and vanity. It binds nations by ligaments, and promotes an interchange of food and of commodities, thus making it feel to be a unit. The iron rails become a nerve system, which, on the one hand, strengthens public opinion, and, on the other hand, strengthens the power of the state for police and governmental purposes.[50]

Lacking a technological base at first, the Germans imported their engineering and hardware from Britain, but quickly learned the skills needed to operate and expand the railways. In many cities, the new railway shops were the centres of technological awareness and training, so that by 1850, Germany was self-sufficient in meeting the demands of railroad construction, and the railways were a major impetus for the growth of the new steel industry. Observers found that even as late as 1890, their engineering was inferior to Britain’s. However, German unification in 1870 stimulated consolidation, nationalisation into state-owned companies, and further rapid growth. Unlike the situation in France, the goal was support of industrialisation, and so heavy lines crisscrossed the Ruhr and other industrial districts, and provided good connections to the major ports of Hamburg and Bremen. By 1880, Germany had 9,400 locomotives pulling 43,000 passengers and 30,000 tons of freight, and pulled ahead of France.[51][52]

Perkins (1981) argues that more important than Bismarck's new tariff on imported grain was the introduction of the sugar beet as a primary crop. Farmers quickly abandoned traditional, inefficient practices for modern new methods, including use of new fertilizers and new tools. The knowledge and tools gained from the intensive farming of sugar and other root crops made Germany the most efficient agricultural producer in Europe by 1914.[53] Even so, farms were small in size, and women did much of the field work. An unintended consequence was the increased dependence on migratory workers, especially from Germany's Polish districts.[54]

The BASF-chemical factories in Ludwigshafen, Germany, 1881

The economy continued to industrialize and urbanize, with heavy industry (coal and steel especially) becoming important in the Ruhr, and manufacturing growing in the cities, the Ruhr, and Silesia.[55] Based on its leadership in chemical research in the universities and industrial laboratories, Germany became dominant in the world's chemical industry in the late 19th century. Big businesses such as BASF and Bayer led the way in their production and distribution of artificial dyes and pharmaceuticals during the Wilhelmine era, leading to the German monopolisation of the global chemicals market at 90 percent of the entire share of international volumes of trade in chemical products by 1914.[56]

Germany became Europe's leading steel-producing country in the late-19th century, thanks in large part to the protection from American and British competition afforded by tariffs and to cartels.[57] The leading firm was "Friedrich Krupp AG Hoesch-Krupp" run by the Krupp family.[58] The "German Steel Federation" was established in 1874.[59]

The end of the 19th and the beginning of the 20th century associates with the time of expansion in demand, the growth of the production capacity and the rise of exports to Germany. This in its turn stimulated the foreign direct investments (FDI) into the economics. Ten countries were considered the major investors, namely: Austria-Hungary, the UK, followed by France, USA, Italy, Russia, Poland (was a part of neighbouring empires), Switzerland, Netherlands, and Czechoslovakia (as a part of Austria-Hungary). Their aim was to get via FDI the access to raw material, and to get involved into the production and sales. The preferred methods of investments were via equity stakes, mergers and Greenfield investments. In order to implement the destination analysis of the FDI during this time frame mostly knowledge-capital model is used due to the predominant role of horizontal investments (or market-driven FDI). Moreover, there were found some evidence of the vertical investment structure (known as cost-driven FDI). To be more precise, when there were the wage differences between countries the FDI flows were higher to the low-wage ones. Major factors that influenced FDI were market environment (e.g. tariffs and market opening) and company size. Interestingly, cultural differences or distance between countries did not have major influence on FDI.[60]

Unexpectedly Germany plunged into World War I (1914–1918). It rapidly mobilized its civilian economy for the war effort. The economy suffered under the British blockade, which cut off supplies.[66] The impact of the blockade was gradual, with relatively little impact on German industry in the first couple of years.[67] Mobilization and armament caused a short-lived but dramatic economic shock at the beginning of the conflict: unemployment spiked from 2.7% in July 1914 to 22.7% in September.[68] The unemployment level thereafter fell dramatically, as war industry and recruitment placed a massive demand on manpower. Intervention by the government in the economy was also moderate at the beginning, because the war was anticipated to be brief. Securing materials for armaments production and the control of food markets were two areas where the German government was involved from the start of the conflict. Private corporations were created under the supervision of the government to oversee specified industries and manage the supply and distribution of foodstuffs. This began in November 1914 with the establishment of a wheat corporation.[67] There were around 200 of these corporations by the end of the war, representing an unprecedented level of cooperation between government and the private sector.

The insatiable demands on manpower led to yet more government intervention and triggered a massive redistribution of the workforce from "peacetime" industries to war industries and the military. High levels of conscription into the army threatened to deprive the armaments industry of workers, with the result that by 1916 the German government began exempting large numbers of otherwise eligible men from military service so they could remain as workers. Overall this balance between conscription and industry was handled efficiently, with Germany's industrial workforce shrinking by only 10%. About 1.2 million men were exempted in 1916, 740,000 of whom were fit to serve; by 1918 2.2 million men had been exempted from service, 1.3 million of whom were fit to serve.[68] There was an exodus of workers from "peacetime" industries and agriculture into the better-paid war industries, which claimed 45% of the work force by 1918. The result was that "peacetime" industry declined by about 43% over the course of the war, claiming only 20% of the workforce by 1918.[68]

Germany exploited her own natural resources and those of her occupied territories to fill the import gap caused by the British blockade, while neutral neighbors like the Netherlands and the Scandinavian nations exported crucial foodstuffs like wheat to keep the German population fed. There were some commodities, like rubber, cotton, and nitrates (Saltpeter), which Germany could not easily substitute from within, and which she could not obtain from her neutral trading partners because the Allies classified them as contraband. The loss of nitrate imports, vital for the production of both explosives and fertilizers, proved disastrous for German agriculture. German chemical firms turned to producing synthetic nitrates, but output was only high enough to sustain the explosives industry. Without fertilizer, agricultural productivity declined dramatically. The freezing 'Turnip Winter' of 1916-17 only compounded the growing subsistence problem; wheat and potato crops failed and Germans had to turn to turnips to satisfy their nutritional needs, a vegetable previously used for livestock feed.[69]

The cumulative impact of the First World War on the German economy was disastrous. The Germany economy shrank by approximately one-third during the war, with overall industrial production down by 40% compared to pre-war levels.[68]

British economist John Maynard Keynes denounced the 1919 Treaty of Versailles as ruinous to German and global prosperity. In his book The Economic Consequences of the Peace.[70] Keynes said the Treaty was a "Carthaginian peace", a misguided attempt to destroy Germany on behalf of French revanchism, rather than to follow the fairer principles for a lasting peace set out in President Woodrow Wilson's Fourteen Points, which Germany had accepted at the armistice. Keynes argued the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay, and that these would produce drastic instability.[71] French economist Étienne Mantoux disputed that analysis in The Carthaginian Peace, or the Economic Consequences of Mr. Keynes (1946). More recently economists have argued that the restriction of Germany to a small army in the 1920s saved it so much money it could afford the reparations payments.[72]

In reality, the total German Reparation payments actually made were far smaller than anyone expected. The total came to 20 billion German gold marks, worth about $5 billion US dollars or £1 billion British pounds. German reparations payments ended in 1931.[73]

The war and the treaty were followed by the Hyper-inflation of the early 1920s that wreaked havoc on Germany's social structure and political stability. During that inflation, the value of the nation's currency, the Papiermark, collapsed from 8.9 per US$1 in 1918 to 4.2 trillion per US$1 by November 1923.

Prosperity reigned 1923–29, supported by large bank loans from New York. By 1929 GDP per capita was 12 per cent higher than in 1913 and between 1924 and 1929 exports doubled.[74] Net investment reached a high average figure of nearly 12 per cent.[75] However, unemployment was over two millions by the winter of 1928–29.[75]

The Great Depression struck Germany hard, starting already in the last months of 1927 .[76] Foreign lending, especially by New York banks, ceased around 1930. Unemployment soared, especially in larger cities, fueling extremism and violence on the far right and far left, as the centre of the political spectrum weakened. Capital flows finally reversed in 1931 and a currency crisis ensued.[77] At the same time as Germany was hit by a banking crisis, when the second largest German bank, the Danat-Bank, failed. At the peak of the crisis the United States, with the Hoover Moratorium, unilaterally declared a one-year moratorium on all reparations and war debts. Germany had paid about one-eighth of its war reparations when they were suspended in 1932 by the Lausanne Conference of 1932. The failure of major banks in Germany and Austria in 1931 worsened the worldwide banking crisis.[78]

Germany was among the countries most severely affected by the great depression because its recovery and rationalization of major industries was financed by unsustainable foreign lending. War reparation obligations reduced investment propensity and, perhaps most importantly, the government implemented a rigid austerity policy that resulted in deflation.[79][80]

As unemployment reached very high levels, the national socialists accumulated government power and began to pursue their inhuman policies against the Jewish minority, political leftists and many other groups. After being elected, the national socialists undertook a series of rapid steps to abolish democracy. Their trade policy in Germany consisted of an autarkic policy regime that aimed to cancel all imports, such as foodstuffs, that could be replaced with domestic substitutes or raw materials for the consumer-oriented industries. Only imports of iron ore and similar items were considered necessary because a main aim of the government was to strengthen the production capacity of military products. Both the persecuted and non-persecuted German groups suffered from these autarkic and trade-restraining policies.[81]

The Marshall Plan was implemented in West Germany 1948-1950 as a way to modernize business procedures and utilize the best practices. The Marshall Plan made it possible for West Germany to return quickly to its traditional pattern of industrial production with a strong export sector. Without the plan, agriculture would have played a larger role in the recovery period, which itself would have been longer.[101][102]

The use of the American model had begun in the 1920s. [103] After 1950, Germany overtook Britain in comparative productivity levels for the whole economy, primarily as a result of trends in services rather than trends in industry. Britain's historic lead in productivity of its services sector was based on external economies of scale in a highly urbanized economy with an international colonial orientation. On the other hand, the low productivity in Germany was caused by the underdevelopment of services generally, especially in rural areas that comprised a much larger sector. As German farm employment declined sharply after 1950 thanks to mechanization, catching-up occurred in services. This process was aided by a sharp increase in human and physical capital accumulation, a pro-growth government policy, and the effective utilization of the education sector to create a more productive work force.[104]

• Pollard, Sidney and Colin Holmes, eds. Documents of European Economic History: Process of Industrialization, 1750-1870 v. 1 (1968) passim.
  • Pollard, Sidney and Colin Holmes, eds. Documents of European Economic History: Industrial power and national rivalry 1870-1914 v. 2 (1972) passim
  • Pollard, Sidney and Colin Holmes, eds. Documents of European Economic History: The End of the Old Europe 1914-1939 v. 3 (1972) passim

•  This article incorporates public domain material from the Library of Congress Country Studies website http://lcweb2.loc.gov/frd/cs/. Germany