There was a peculiar quality to this economic expansion. Banks, particularly
investment banks gave the specific stimulus to industrialization. It was
a combination of commercial enterprise, investment, and investment trusts
backed by large central banks. These banks invariably controlled large amounts
of stocks and bonds in corporations, whose deposits gave them financial
capital to invest. This was a peculiar German phenomenon, where banks from
the beginning were conceived as ways to finance industry rather than provide
credit for the public--as in the United States and Great Britain. Savings
of the public were normally deposited with municipal savings institutions.
These giant central banks had unprecedented voting power and influence over
their customers by virtue of their own stock portfolios. They participated
directly in the management of industries, since their own officers sat on
the boards of directors of their client firms and vice versa. As investment
drifted to the largest industrial firms, these banks also began to consolidate.
The famous "D-banks" of Berlin themselves amalgamated after the
war, when the Deutsche Bank and Disconto Gesellschaft merged in 1929. The
Dresdner Bank absorbed the Darmstädter Bank in 1931. In the end a monopoly
of half a dozen banks was established. This process had tremendous effect
on industry, which followed suit through vertical and horizontal cartelization.
The famous socialist concept of "finance capital" has its historic
roots in this phenomenon.
These banks also played a key role in the remarkable increase of German
trade, particularly with respect to exports. Germany rose from 4th place
in exports in 1880 to second place by the turn of the century. The ratio
of finished product to total export jumped from 38% in 1873 to 63% in 1913.
German banks were at the core of the process by establishing branches in
Europe, England and the U.S., where German capital helped to finance the
railroad building boom. German capital also migrated to Latin America, the
Near Fast, the Far East, the Balkans and North Africa. The D-banks established
branch houses in many of these areas. Even though Germany still had an import
surplus, she became a capital exporting nation in the 1880's. She achieved
a favorable balance of payments primarily because of
1. income from shipping,
2. a central European rail net,
3. services and profits from German foreign banks, and
4. the sale of German patents abroad.
Between 1886 and 1912: 10.6 billion marks of foreign securities were issued
in Germany. Foreign capital investment by Germany amounted to 30 billion
marks. Foreign capital investment in Germany was a paltry 5 billion.
In the light of these facts it is interesting to note that there was very
little investment in German colonies. But in the Balkans German money followed
German political influence, particularly in Rumania and Turkey, with the
D-banks leading the way.
Protection became a feature of this economic development at the end, rather
than the beginning. So it would be a mistake to attribute the imperial economic
wonder largely to protective tariff policies. Prussian trade policies in
the middle of the 19th century were essentially free trade. The Zollverein
had many free trade treaties on the most-favored nation basis. The situation
changed after the 1873 depression, which transformed the Junkers and Bismarck
into protectionists.
In the 1870's agricultural costs went up in Germany but descended in other
countries. The U.S. began to dump grain and Germany started to import grain.
A tariff bill passed in 1879-1880 reintroduced duties on agricultural products,
on iron and some industrial goods and textiles. But these duties were moderate--only
5% on wheat and rye, although they were raised in 1887 and lowered again
in 1890. After the turn of the century they were raised once more, although
they remained lower than those of the U.S., Russia, France and Austria.
Bismarck had been categorically opposed to colonies. He left colonies to
French energies, which found no meaningful outlet on the continent. But
a change in trade policy brought renewed interest in colonies. Germany thus
acquired colonies
1. in Africa in 1884-1885,
2. Kiaochow in China during 1899,
3. the Carolines and half of Samoa in 1900.
By then Germany controlled l,000,000 square miles and 13,000,000 people
abroad. This mini-imperial domain, however, attracted only 24,000 white
settlers in 30 years. Some 5,700 of those were military men and policemen.
These colonies attracted no more than 2% of German foreign capital investment,
concentrated mostly on diamonds, rubber and vegetable oil products. One
could hardly speak of a market for industrial goods or significant supply
of raw materials. Although a Colonial Office was established in 1907, increasing
the imperial tempo, it hardly made a noticeable difference.
If colonization did not play a significant role in industrialization, government
ownership certainly did. Because Germany had a large section of the economy
controlled by the state, she could more easily switch to a mercantilist
policy after the 1880's.
First came the nationalization of the railroads, which grew from 6 miles
in 1835 to 62,410 miles in 1915. In Brandenburg, Braunschweig, Württemberg
and Oldenburg the rails were owned by the state from the start. In the Reich
as a whole one-half of the railroads were controlled by the government in
1875. In Prussia the rails were nationalized through the issuance of government
bonds, but not all provinces followed suit. Until the Weimar period there
were still 8 different railroad systems, which the republican government
finally unified into a single Reichsbahn.
The government, either state or federal, had a hand in most service enterprises.
There was a lot of so-called municipal socialism, where the city or provincial
government owned such enterprises as mines. There was also mixed ownership,
particularly in the gas and water systems. But the state owned completely
the postal service, telephone, telegraph and railroads. Power supply was
under municipal or state ownership. The Reichsbank was still privately owned,
although the Kaiser appointed the officers and president of the central
bank and the leading stockholders had absolutely no influence on bank policy.
There were also other powerful state banks. Savings banks were under municipal
control.
Let us turn now to more general considerations of Germany's economic development
at the end of the 19th century. Recent research (Karl Erich Born) suggests
that the second industrial revolution, i.e., rapid industrialization, was
promoted by a number of important factors. Most important of these was probably
the scientific-technological developments at the end of the century. By
1870 Germany had caught up with Britain's head start in the raw material
industries. Coal furnaces were replaced by coke furnaces, whose production
capacity was five times greater and the steel industry switched to the Bessemer
process.
The growth of the German optical, chemical, and electro-technical industries
was stimulated by systematic scientific technical research in industrial
laboratories and technical institutes.
Another factor which propelled German industry forward was the unification
of the monetary system, made possible in part by political unification.
Even before the introduction of the Deutsche Mark in 1871, various types
of currency, such as thalers and guilders, were coined according to common
guidelines set by currency agreements. The legal introduction of the gold
currency in 1873 became fully effective only in 1907, because until then
silver coins retained their value.
The most significant new legislation on the currency was undoubtedly the
Federal Banking Law. This law removed scattered paper currencies of uncertain
legality, and at the same time converted the Prussian bank into a National
Bank. This made bank notes a valid medium of exchange and therefore allowed
the flow of currency to match the fast-growing economy.
Industrialization was also promoted by liberalization of laws governing
joint stock companies. Restrictions on the establishment of joint stock
companies were removed. Thus it was possible to mobilize, centralize, and
coordinate scattered private capital to finance big industrial undertakings.
The rush to establish large corporations, and the influx 4.2 billion Deutsche
Marks from French war reparations, led to an economic depression in 1873.
This was in fact only the German version of a general economic crisis, but
it led to a shift from free trade policies to protectionism.
In addition to the turn to protectionism, the depression produced many business
failures. Of 857 joint-stock companies that were started in Prussia after
1870, 160 were in liquidation or bankruptcy in 1874. This gave new impetus
to the movement toward concentration. This movement culminated in the founding
of large enterprises, cartels, and syndicates.
There were two periods in the development of German cartels before 1914.
The cartels formed during the first period, between the 1870's and 1880's,
were defensive measures against the economic crisis of 1873 and later. They
were designed to hold off the flooding of the domestic market with goods
through voluntary reduction in production. In most cases these cartels dealt
with the merging of smaller and medium-sized enterprises. Generally they
were transitory. Most of them disappeared when the depression was over.
In the second period, after the mid-1890's, when there was rapid and large-scale
industrial growth, cartels were formed among big businesses. The aim now
was monopolistic domination of the market. In this period arose the contingency
cartels of the raw material industries, with their own sales organizations,
and the syndicates.
Among the syndicates were the Rhine-Westphalian Coal Syndicate, the Steel
Association, and the Limestone Syndicate. In the end, cartelization included
between 60 percent and 90 percent of production in the raw material industries.
Through cartel arrangements the raw material industries took advantage of
the protective tariff to keep the prices high on the domestic market. At
the same time they sought to conquer the foreign sales markets with lower
export prices.
The shift of the economic center of gravity from agriculture to industry
resulted in significant internal migration and urbanization in Germany.
Until about 1870, population growth, continuous since the middle of the
18th century, had still not led to any significant shift in the relative
size of urban and rural populations. The migrations that are so characteristic
of Germany's demographic history between 1880 and 1910 were limited to the
northwest and the southwest before 1870.
East-West inner migration started at the end of the 1860's. It flowed from
East and West Prussia, Silesia, Pomerania, and Posen toward the industrial
center-Berlin. In the 1870's it extended into central German industrial
areas and in part into the Rhineland and Westphalia. Then after 1880 the
movement was from the Prussian eastern provinces into the Ruhr area.
Until 1893, this east-west inner migration was accompanied by emigration
abroad. After the 1870's eastern Germans played a larger role than those
from the southwest in external migration. On the average, over 100,000 German
emigrants, mostly farmers, left the German Empire annually until 1893. In
1893, when the free settlement of land in North America ceased and at the
same time German industry began to expand, the emigration declined to 30
percent of its former size. After 1900, the immigration of foreigners to
Germany was greater than German emigration abroad.
Until 1914 inner migration from eastern Germany involved over 2 million
people, who departed for the Ruhr area, central Germany, and Berlin. The
population of greater Berlin vastly increased during this period. In fact,
it was during this period that Berlin became truly a world city and a leader
in many fields of cultural and political endeavor: art, music, literature,
and the motion picture industry.
A further result was a change in the relative size of the urban and rural
population: in 1871 two-thirds of the German people still lived in rural
communities, but on the eve of World War I, the urban population comprised
almost two-thirds of the nation. This urbanization especially encouraged
the growth of large cities. In 1910 more than 21 percent of the German population
lived in large cities, in 1871 it was not even 5 percent.
In summary it can be said that there were a number of structural changes
involved in Germany's transition from an agrarian to a highly-industrialized
nation and society. Traditional corporate social and economic institutions
(estates, guilds, mercantile, political-economic organizations) were abolished
at the beginning of the 19th century. But they were not replaced by permanent
social and economic organizations until the end of the last third of the
century. Each individual stood alone. It was a highly individualistic, middle-class
era. In the period of rapid industrialization, big businesses, conglomerates,
cartels, and large interest groups provided the organizational foundation
for the new industrial age.