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Germany’s History: Impediments to Continental Industrialization Essay

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Updated: May 20th, 2020

Introduction

Germany encountered major impediments to industrialization in the early 19th century due to lack of adequate financial capital and poor transport and communication. The Napoleonic wars left the country in a poor economic state, making it hard for the government to support industrialization. Inflation rate was high in the country such that to start an industry; investors required having a lot of money. Despite the barriers, Germany, through the help of the banks managed to promote industrialization (Lee 346-351). In the end, Germany overtook majority of the countries that were already industrialized.

Banks offered financial support to the industries and supported them until they became fully established, which did not happen in other countries like Russia where the government promoted industrialization and economic growth at the times of military pressure only. In addition, Germany came up with cartelization policies, which helped the industrial enterprises pool their resources together, thus curbing unhealthy competition. Cartelization helped the steel industry to increase its output, therefore growing in size. This paper will focus on the main challenges to industrialization that Germany faced after the Napoleonic wars. Moreover, the paper will discuss how Germany managed to surmount these challenges.

Chief barriers to economic growth

Among the European states, Germany encountered significant barriers to economic growth and industrialization after the Napoleonic wars. This aspect underlines the reasons why Germany was among the last states to witness substantial industrialization after the war. Among some of the chief barriers to economic growth and industrialization in Germany after the Napoleonic wars included, breakdown of trade between the states in Germany, interruption of communication between the German states and Germany with other European states, and high rate of inflation in Germany. During the Napoleonic war, Germany was split into numerous states. Majority of these states were not in agreement with one another (Kindleberger 185-193). Therefore, no significant trade went on between the states.

With every state relying on itself, it was hard for the country to experience an economic growth. One of the strategies that Napoleon applied during the wars was to cut any close ties between states or countries. For instance, he aimed at establishing an impediment between Britain and mainland Europe. He initiated similar impediments between the states in Germany as a way of making them weak. For instance, he made sure that there were impediments between Prussia and Austria, which were the two major states (Kindleberger 201-234). Eventually, after the Napoleonic wars, it was hard for these states to unite and forge common economic growth policies. Each state strived to gain control of the country, therefore, becoming hard for the country to witness significant industrial growth.

Another barrier to industrialization in Germany after the Napoleonic wars was the lack of adequate experts and financial resources to help the country set up industries. The Napoleonic wars had negative impacts on the country’s system of education. Hence, majority of the Germans did not have adequate knowledge to run or manage industries. It was hard for Germany to witness significant industrial growth without relying on experts from other countries like the United States. Besides the expertise, the country did not have adequate financial resources to support industrialization (Kindleberger 236). During the wars, no significant trade took place within Germany and between Germany and other states. Consequently, the German government did not have financial resources to support industrial growth after the wars.

Overcoming the barriers

For Germany to witness significant economic growth and industrialization, it had to overcome the barriers posed by the Napoleonic wars. One of the strategies that Germany applied to overcome these barriers was the establishment of a superior banking system. To promote economic and industrial growth, Germany required having a financial system that would support the upcoming industries. Consequently, the country established a banking system that ensured that the banks did not only fund the establishment of the industries, but they also supported the infant industries until they became strong. Banks in Germany facilitated in overcoming the financial and expertise hardships encountered after the Napoleonic wars (Carsten 39-43).

Another approach that Germany used to overcome the economic and industrialization barriers was enhancement of communication between the different states. In 1835, Germany constructed its first railway line connecting Leipzig to Dresden. By 1850, the country had numerous railway lines connecting the different states. This move opened communication between the different states. The states could now liaise and exchange their products thus promoting trade between the states, which eventually fueled industrialization. Construction of the railway line stimulated economic and industrial growth across the country (Carsten 45-57). The different states could now trade freely without encountering transport challenges. Consequently, industries started cropping up to serve the needs of people in different states. With time, industrialization in some of the German states started taking off. For instance, the Prussian state made use of its iron and coalfields to establish an iron industry. By the beginning of the twentieth century, Germany was already competing with Britain in terms of industrial growth.

Why Germany was successful

Relative to countries like France and Russia, Germany managed to overcome the barriers to economic growth and industrialization caused the Napoleonic wars easily. One of the reasons that made Germany overcome these barriers without difficulties was the establishment of the banking system. Germany made use of its banks to promote economic growth and to foster industrialization (Lee 357-361). Prior to the World War I, Germany focused on the development of heavy industries. The banks directed all their energy to helping in the development and growth of mining, coal, and steelmaking, and general engineering industries.

Besides focusing on heavy industries, Germany made use of the cartelization system to promote economic and industrial growth. Numerous banks in the country came together, giving the banks the power to manage competing industries within the country. The banks declined to stomach fratricidal competitions among the industries. Besides, they helped the upcoming industries to identify and capitalize on business opportunities. According to Lee “… from the vantage point of centralized control, they were at all times quick to perceive profitable opportunities of cartelization and amalgamation of industrial enterprises” (366). This move facilitated in the enlargement of the industrial size, while concurrently serving the interests of the banks. Indeed the late arrival of Germany in the industrialization arena gave it an upper hand. The country borrowed some ideas from Britain, which it enhanced and made its industries more influential in the region, which did not happen in countries like Russia.

For instance, Russia continued experiencing economic backwardness because of embracing serfdom. When trying to expand its territory, Russia entered into military conflicts with the West. This move led to a serious internal conflict in Russia. The country sought to align its military policies with the national economy. Eventually, the country’s economic development adopted a series of atypical sequences. For instance, military interests dictated on all economic developments in Russia (Gerschenkron 58). The fact that economic development in Russia changed based on military needs meant that the country would only witness significant economic development whenever there were serious needs within the military. There was no significant economic growth whenever Russia did not experience military pressure.

The fundamental rudiments of a backward economy were entirely similar in both Germany and Russia. Nonetheless, quantitatively, the disparities were alarming. The dearth of money in Russia was so severe that no banking system could plausibly be successful in attracting adequate funds to sponsor a large-scale industrialization. Moreover, the level of honesty in business was low and distrust within the public high such that no bank could manage to accumulate adequate financial resources (Gerschenkron 54-59). Besides, no bank was willing to enter into long-term credit in an environment full of sham bankruptcy. To promote any substantial industrialization in Russia, the government had to help. Hence, the government had to use the taxation policies to divert part of the income obtained from consumptions to investment.

France too used the banking system to promote economic and industrial growth. The country came up with Credit Mobilier, which offered financial services to industrial investors. Nevertheless, the bank had an industrial assortment that exceeded its financial capacity. Hence, it relied on constructive growths in the stock exchange for sustenance of its projects. Unlike the German banks, Credit Mobilier did not establish close ties with industrial enterprises (Gerschenkron 63-70). Hence, it did not monitor the operations of the industries in the country. Ultimately, Credit Mobilier could not get any return from the industries making it hard for France to witness significant economic growth.

Gerschenkron’s model of economic backwardness

Gerschenkron’s model of economic backwardness is noticeably anti-Marxian. The model refutes the claim that the English Industrial Revolution followed the normal trend of the industrial revolution. Besides, the model is anti-Restovian. Gerschenkron’s insists that the different European countries did not witness similar stages of economic growth during the industrial revolution (Gerschenkron 23-31). The model followed Gerschenkron’s astonishing study of the developmental encounters of Germany, Russia, Italy, France, Bulgaria, and Austria. Gerschenkron’s model of economic backwardness fits Germany in the 19th century. The model comes with a consistent and logical order of the German experience during the 19th century. The Germany history of the industrial revolution bears the weight of this model largely.

Gerschenkron came up with a general approach that could facilitate in explaining economic growth of majority of the late comers into the industrialization arena. Germany is one of the countries that attained industrialization late in Europe. The model gives an insightful idea of backwardness, which portrays an original and brilliant approach to Germany’s economic history (Gerschenkron 34-54). With the latest development in political economy, this model would significantly facilitate to understand the historical economic backwardness in the European countries. Furthermore, the model fits other countries like Russia and France. Gerschenkron had a chance to blend institutions, ideology, and the historical knowledge of industrialization. Being a Russian, he blended the three to come up with a clear explanation of the economic backwardness based on his experience in Russia.

Role of government and financial institutions

The government (both state and national) as well as the financial institutions played significant roles in overcoming the challenges of economic growth and in stirring swift industrialization in Germany. One of the ways in which the states governments facilitated to overcome barriers to economic growth and industrialization in Germany was through construction of the railway lines (Tipton 139-143). In 1818, Prussia came up with the idea of a common market and later an agreement made in 1833 extended the Zollverein to other German states. The notion of a common market led to the state governments embarking on strategies to enhance communication and accessibility between the states. Establishment of the rail system led to increase in demand for coal and steel in Germany (Fischer 447-458).

Eventually, the country came up with a mining industry to facilitate in coal extraction. Furthermore, a steel industry emerged within the country. Returns from the two industries led to growth of capital markets and banks in Germany. Zollverein eradicated internal tariffs and introduced a protective tariff that sought to discourage importation of products from other countries, which created a local market to products manufactured by the domestic industries. Reduction in competition from the imported products helped the local industries to accumulate adequate financial resources leading to their expansion.

The national government facilitated in overcoming the barriers to economic and industrial growth by promoting a good economic environment at national level. The government encouraged the growth of banking institutions, which in return, offered financial services to the upcoming industries. Besides, the national government came up with favorable taxation policies that helped Germany to work on its capital market (Tipton 149). In return, this ensured that there were enough financial assets in the country to support industrial growth. Unlike the Russian government that turned to industrialization when faced with military pressure, the German government gave industrialization the first priority. Immediately after the Napoleonic wars, it started working on modalities to help it industrialize to be able to compete with countries like Britain in the regional market.

Banks were the major contributors to industrialization in Germany. The banks offered financial and advisory services to industrial investors and are said to have worked with industrial enterprises from their initiation to their liquidation period (Carsten 63). Hence, industrial enterprises were sure of getting financial assistance from the banks at all time. Prior to the World War I, the German banks focused on the development of heavy industries. They focused on the iron and steel industry as well as the coal industry. The banks helped industrial enterprises to merge, therefore, pooling their resources together, which boost their productivity. Besides, the merger reduced the level of rivalry and competition among the industries.

Cartelization of industries

Cartels were a positive feature of German industrialization. Through cartelization, Germany managed to increase the output of its steel industries. Besides, cartels facilitated to curb competition in the steel industry (Tilly 629-634). Among the factors that led to cartelization of certain industries in Germany included stiff competition between industries producing similar products. In the steel industry, competition was very high. In a bid to ensure that industries working in this sector got substantial return, the banks advised the industrial enterprises in this sector to establish cartels to facilitate in production and sale of their products. The cartel policies had significant success.

They facilitated in the amalgamation of steel industries in Germany (Web 309-324), which helped the industries to increase their output and to grow in size. Through cartelization, the industries could identify profitable opportunities and capitalize on them. Prior to cartelization, individual industries had to look for markets for their products. This aspect encouraged an unhealthy competition between the local industries giving foreign industries an opportunity to exploit the German market. Introduction of cartels led to German industries pooling their resources together, a move that helped them overcome competition from foreign companies.

Conclusion

The Napoleonic wars left Germany in a situation where it could hardly industrialize. The wars led to the disruption of communication between the various states. Besides, transportation was very poor and the country did not have adequate financial resources to support industrialization. In a bid to overcome these challenges, it called for concerted efforts among the states’ government, national government, and banks. The states’ government came up with trade agreements that facilitated in trade between the different states. On the other hand, the national government embarked on rail construction to open up the different states to trade. Banks helped to offer financial assistance to infant industries and they supported the industries until their liquidation period. Besides, they helped industrial enterprises to establish cartels, which helped to curb competition, therefore promoting industrialization in Germany.

Works Cited

Secondary sources

Carsten, Burhop. “Did Banks Cause the German Industrialization?” Explorations in Economic History 43.1 (2006): 39-63. Print.

Lee, William. “Economic development and the state in the nineteenth-century Germany.” Economic History Review 2.41 (1988): 346-367. Print.

Tilly, Richard. “Mergers, external growth, and finance in the development of Large-scale enterprises in Germany, 1880-1913. Journal of Economic History 42.3 (1982): 629-658. Print.

Tipton, Frank. “Government policy and economic development in Germany and Japan: A skeptical reevaluation.” Journal of Economic History 41 (1981): 139-150. Print.

Web, Steven. “Tariffs, cartels, technology, & growth in Germany steel industry, 1879-1914.” Journal of Economic History 40.1 (1980): 309-330. Print.

Supplementary sources

Fischer, Wolfram. “Government activity and industrialization in Germany, 1815-1870.” European and the Industrial Revolution. Ed. Sima Lieberman. London: Routledge, 1972. 447-458. Print.

Gerschenkron, Alexander. Economic Backwardness in Historical Perspectives. Harvard: Belknap Press, 1965. Print.

Kindleberger, Charles. “Economic Response: Comparative Studies in Trade, Finance, and Growth.” Germany’s overtaking of England, 1806-1914. London: Routledge, 1978. Print.

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