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Financial System, Financial Markets and Understanding of Capitalism in Germany and the U.S. Term Paper

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Updated: Sep 12th, 2021

Introduction

This paper discusses and compares two of the world’s prominent developed economies, which include Germany and the US. The paper is based on the phenomenon that despite being developed economies Germany and the United States each have a very different and distinct financial and capital set up in their regions. The reason for this has been primarily identified as to the experiences and the events the countries have had to face in the past century.

By analyzing and observing the events that have taken place in the past and divulging into the history of these nations we were able to identify that the United States of America has a much more liberal and consumer oriented economy which is financed through corporations as well as the stock exchange and foreign exchange. Germany on the other hand has a more capitalistic approach towards its economy where everything is controlled by the central bank which is owned by the state.

General Points of Comparison

The reason for these two countries having such a dissimilar structure mainly pertains to the fact that US was one of the countries which was victorious as a result of the World War II and therefore was able to take advantage of a more efficient workforce at home. More over the company invested in military communication systems and technology which aided the country to develop its economy and infrastructure based on this technology. Many small scale niche industries providing specialized products to businesses and consumers sprung up which were successful in the 60’s and 70’s resulting in economic boom. This contributed largely to the GDP of the country. Aside from this the country also adopted a consumerist attitude towards its budgeting and spending policies both in terms of the economy as well as the market. At this time the corporations gained strength and were able to form and control the economy for the United States. An article by Richard Ellsworth in 1985 stated that meanwhile the country was able to earn short term profits from its growth through a consumerist attitude in the long run “the market standards for shareholder returns and financial leverage lead to corporate financial goals that divert executives’ attention from the product-market needs that build long-term competitive strength.” (Ellsworth, 1985) He depicts in his article that West Germany organized structure where the goals and the objectives of the company drives the growth in the economy. This is further enforced by their current capital structure. The US model is the structure of financial systems such that the financial markets existent in the region play a major role in influencing the economy.

The German Model for the economy is considered to be one where the banks and the intermediaries instead if the financial markets dominate and influence the economy ad the market (Franklyn & Douglas, 1985). These authors also justified and presented the effect these two economies have on the market as “the U.S. financial system offers several cross-sectional risk sharing opportunities because of the diversity of the markets. Investors in Germany have limited opportunities to share risk cross-sectionally.” Franklyn & Douglas, 1994)

The reason as to why the German capital infrastructure and the economy is set up as such is because of the couture and history of the population living and housing in this regions, After the World War II the country of Germany and its Allies were left to pick itself ad start building the nation all over again. The economy had suffered strong blows pertaining to its defeat in the war. Its strategic alliances with other countries had started falling apart and the economy of the country was a disaster due to the sanctions but on it by the winning party or allies. Prior to the war Germany’s strongest industry was that pertaining to the Aircraft and jet engines. During the war these companies flourished as the supply for the products manufactured by them went up and they even learnt to operate on limited resources during the war. However after the war concluded the economy fell into despair. The population of the country had already suffered a lot and the aircraft and jet engine industry was banned from making jet engines. AS a result with nowhere else to go and no other skills Germany stared making automobiles and started fitting them with jet engines. This gave rise to companies like Mercedes, Lamborghini, Ferrari, BMW and Porsche.

The cultural aspect which made the economies of these two countries develop in a varied manner is that the United States has a consumerist market where the target market wants to spend money because they have a larger level of disposable income. More over the phenomenon of new money also comes into play here which states that people of have recently acquired wealth or are exposed to higher level of salaries tend to be less cautious about their purchasing and investment trends.

The increased level of savings and disposable income had led to a significant level of increase tin their wealth. As a result hen the country faced better economic periods the population of the country started investing in growing markets and industries as well as in the government of the country itself. This made the country develop a diverse capital infrastructure.

Germany on the other hand is very much like the other European countries that were facing economic barriers to trade after the World War. This made the country be more organized and work from the pockets and funds of the banks and intermediaries who had access to the monetary reserves in the regions. Aside from this due to the historic nature of the region and the cultural ties the people in the country had to others in the European region, they were highly conservative and savings oriented. After the war the population of Germany was focusing on surviving through the harsh times while saving for their children’s and the generations of the futures. This combined with the autocratic nature and culture of the people led to the development of the already existing bureaucratic government and public corporate system.

The infrastructure of the country was driven by the regional and central banks which were owned by the government. This strict control over the resources allowed the country to provide for its corporate as well as the public sector in terms of resources and funds for their development. This came to be known as the capitalistic form of economy where everything was driven by one entity usually the state. The capital structure of the country in this case was driven through the central bank or the central monetary reserve of the region.

“Specifically, with the exception of a flirtation with equity finance during the bubble years, there have been only limited changes in household savings behavior and company demand for finance. The reasons for this, which have been explored elsewhere, include the relatively low levels of inequality in Germany (and thus a relatively large, risk-averse, savings- oriented middle income group) and the characteristics of the German production system (capital-intensive manufacturing with a large SME sector)” (Vitols, 2004).

Another reason as to why the economy and its capital structure was capitalistic and the level of capitalization in this region was relatively low as compared to other countries at the tine was basically because of the low number of firms and corporation that were listed on the stock exchange. The relatively small number of companies trading on the stock exchange made the trade of the country to be smaller than other in volume and bulk as well. “In 1991, 665 domestic companies were listed on Germany’s stock exchanges, versus 2027 for the UK, a country almost as large as Germany in terms of population and economic output.” (Vitols, 2004) This factor was further aggravated by the fact that there were very few new companies which displayed eagerness to list with the stock exchange. This was caused mostly due to the uncertainty in the region after 1945 which prompted a more reserved spending and investment policy for Germans.

Conclusion

Conclusively it can be said that Germany has a more capitalistic economy and the capital structure compared to other countries like, mostly because of the saving oriented nature of the people residing in the country and the strength of the German Bank and Monetary reserve at the time of the implementation of the anti trust after the World War II.

Reference

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