Finance Capitalism and Germany’s Rise to Industrial Power

Published by EH.NET (September 2007)

Caroline Fohlin, Finance Capitalism and Germany’s Rise to Industrial Power. Cambridge: Cambridge University Press, 2007. xii + 392 pp. $85 (cloth), ISBN: 0-521-81020-5.

Reviewed for EH.NET by Carsten Burhop, Max Planck Institute.

Over the past decade Caroline Fohlin (Research Professor of Economics at Johns Hopkins University, Baltimore) has been one of the most productive researchers in the field of Germany’s financial history. In her most recent book, Finance Capitalism and Germany’s Rise to Industrial Power, Fohlin summarizes the results of her previous research and defends her major arguments. In addition, she adds significant research to the history of German stock markets. Fohlin’s monograph is highly readable, but potential readers should be aware of its limits. The monograph has a clear focus on the history of joint-stock banks and their relationship to industrial joint-stock companies during the three decades preceding World War I. Other types of financial institutions and the developments inside the banks are more or less neglected. In addition, Fohlin uses a cliometric approach throughout, whereas more qualitative results from business history are largely ignored.

In chapters 1 and 3, Fohlin states the major themes of the book ? drawing a detailed and balanced picture of the German financial system by presenting and interpreting well-known and new results. More specifically, she aims to contribute to a set of controversies about the impact of the large German banks on industrialization and on industrial corporations. Chapter 2 interrupts the flow of the argument somewhat by providing a review of current theories regarding the role of banks and markets in financial systems. Nevertheless, this chapter is very useful for readers who are not aware of the recent developments in banking theory. Readers with a basic knowledge of those theories can skip this chapter.

Chapters 4, 5, and 6 are the core of the monograph. A large number of hypotheses regarding the role of joint-stock credit banks during the German industrialization are put forward, the major arguments from the literature are presented and new tests are performed. In Chapter 4, Fohlin analyzes the structures of the aggregate balance sheets and profit-and-loss accounts of the joint-stock banks. Her exposition is very well structured and highly informative. Yet, the results are not new, since the data employed were already published in 1976 by the Deutsche Bundesbank. A second point analyzed in this chapter is the industrial organization of banks in Germany between 1883 and 1913. Concentration ratios increased over time, but that concentration ratios were lower in Germany than in England. Finally, Fohlin investigates the dynamic relationship between the growth of bank assets and economic growth. She concludes that banks were not causal for economic growth in Germany between 1895 and 1913. A major drawback of this chapter is that Fohlin restricts her analysis to the period after 1883, the starting year of the statistical data published by the Bundesbank. Comparable data for the period since 1848 are available, but these were not used by Fohlin.

In Chapter 5 Fohlin investigates the relevance of banks for the corporate governance of industrial joint stock companies. The basic argument put forward in this chapter boils down to an analysis of bank-industry relationships via the supervisory board. Nevertheless, it is a valuable piece of research since many facets of this relationship are analyzed. First of all, Fohlin figures out that the ownership of industrial corporations by banks was very limited and that the major source of power of banks was proxy voting. Moreover, the fact that bankers took up positions in the supervisory board of an industrial corporation was unrelated to the financial structure of the industrial corporation. On the other hand, industrial corporations with stock market listings were more likely to have a banker in the supervisory board. Chapter 6 evaluates the impact of bank monitoring, via the supervisory board, on profits and liquidity constraints of industrial corporations. Fohlin does not find any statistically significant relationship between monitoring by bankers and performance of industrial corporations. However, she shows that industrial corporations listed on the stock market performed better than other industrial corporations.

The main results of Chapters 5 and 6 highlight the importance of stock markets in a supposedly bank-based financial system. Consequently, Fohlin analyzes the relationship between government regulation, the banking sector, and stock market development in Chapter 7. This chapter is clearly the most innovative part of the book. Surprisingly, neither the regulation of stock markets, nor the taxation of stock market activities, nor the structure of the banking sector influenced the development of stock markets in Germany. Banks and markets mutually developed in late nineteenth and early twentieth century Germany. A well-developed banking sector did not restrict the development of the stock market. More specifically, the decisions of industrial corporations to get listed on a stock market were significantly influenced by the size of the firm, but not by close connections to a bank.

Chapter 8 is a short and superficial review of Germany’s financial history from World War I to the 1950s. Putting the events of this period into fifty pages is just too ambitious. Nevertheless, the chapter is still a useful introduction to this part of Germany’s financial history.

A final remark regarding the data employed by Fohlin is in order. It is not always possible to figure the data sources out since the documentation of the tables and figures is incomplete. Moreover, some of the results are based on outdated data. For example, Fohlin still uses a stock market index published in 1934 and not the more recently calculated market indices by Eube or Ronge, which show a different behavior than the old data. Despite some shortcomings, the monograph can be recommended to scholars interested in financial history and to readers interested in the economic history of the German Empire.

Carsten Burhop is Heisenberg-Fellow at the Max Planck Institute for Research on Collective Goods, Bonn. Recent work includes “Did Banks Cause the German Industrialization?” Explorations in Economic History 43, 2006.