Germany 1871: Nation Building and the Transition to Modern Economic Growth

Published by EH.Net (October 2021)

Ulrich Pfister, Jan-Otmar Hesse, Mark Spoerer and Nikolaus Wolf, editors, Deutschland 1871: Die Nationalstaatsbildung und der Weg in die moderne Wirtschaft (Germany 1871: Nation Building and the Transition to Modern Economic Growth). Tübingen: Mohr Siebeck, 2021. xix + 454 pp. €99 (hardcover), ISBN: 978-3-16-160068-5.

Reviewed for EH.Net by Timothy Guinnane, Department of Economics, Yale University.

January of 2021 marked the 150th anniversary of the first unified state in modern German history. For political and diplomatic historians the 1871 Empire (Reich) has long served as a milestone. For economic historians 1871 has held less significance. Some major institutions of German economic integration preceded the Reich. The Customs Union (Zollverein), which included nearly all of the states that later formed the Reich, dates to 1834. Most German states had adopted a common business code in 1861. Other institutions important to economic integration came long after 1871; for example, Germany lacked a common (civil) law code until 1900.

Prussia’s role within the 1871 “small German” Reich (“small” meaning it excluded Austria) poses a second issue. Prussia dominated the North German Confederation (1866-70), which served as the institutional model for the Reich. The new Reich had about 41 million inhabitants, of whom some 25 million were Prussians. Prussia alone was larger than all but a handful of other European countries at the time. France had about 36 million people (1872), the United Kingdom 31 million (1871), and Italy 27 million (1871). Prussia dwarfed other relatively-developed countries such as Belgium (4.8 million in 1866) or the Netherlands (3.6 million in 1869).

The collection under review here treats 1871 in two ways. Most contributors stress longer continuities rooted in pre-1871 history as well as the slow process by which the Reich advanced new forms of economic integration. Others push the significance of 1871 a bit harder, stressing that the Reich adopted some policies that would have been hard to imagine without it. The thoughtful editors’ introduction lays out four channels that could link the Reich to improved economic performance. The first is national identity; the nation-building that followed 1871 could awaken in Germans a “buy German” sentiment that would have meant less to someone who thought of herself as a Hessian or Saxon. Market integration, a second channel, features today in many studies in economic history, economic geography, and related fields. A third channel presumes that under the Reich, the state and federal governments developed new capacities to deliver services that might promote growth. The final channel runs through better economic institutions, including compulsory social insurance and better patent law.

The collection has nineteen chapters plus the editors’ introduction. The twenty-seven authors represent most of the active economic historians of Germany today, while the comparative chapters bring in leading scholars of other countries. The authors are major authorities in their own areas but do a good job of summarizing other views and pointing the reader to a range of literature. There is little technical material that would challenge interested readers from other disciplines. The collection has a “handbook” feel, albeit a handbook that is unusually comprehensive and scholarly.

Felix Kersting and Nikolaus Wolf begin with a fascinating discussion of the role nationalism played in German state formation, stressing the connections to economic and technological developments. This is well-trodden ground, but they offer new perspectives by bringing in insights from the recent literature on the economics of identity and culture. Readers will appreciate their stress on the way states and the movement for national unification used each other to advance often conflicting goals.

Alfred Reckendrees discusses cooperation among state officials before 1871. The states had long traditions of working together both formally and informally to address issues of common concern. Reckendrees stresses informal networks of officials who met and worked together in many different contexts. These networks laid the foundation for the Reich’s ability to coordinate the state offices responsible for executing important policy initiatives.

Gerold Ambrosius discusses the federal structure created in 1871. At one level, the Reich had sole competence for legislation in economic areas. On the other, the new entity at first had little of the requisite bureaucratic apparatus. The federal chancellor (Kanzler) began (with staff, of course) as the only real Reich functionary. The chancellor relied on the Prussian state’s ministries in the absence of Reich equivalents: thus the details of economic policy for the Reich were developed by officials in the Prussian trade ministry. This arrangement suited Otto von Bismarck, who served as both Reich chancellor and the Prussian equivalent (Ministerpräsident) until relieved by the Emperor in 1890. By the late 1870s the Reich had created some of its own ministries (such as Justice and Finance) and acquired a more direct role in policy after Bismarck’s departure.

Ulrich Pfister stresses significant developments in German economic growth starting in the 1870s, but explicitly sets aside the question of the Reich’s causal role in this change. The growth of both GDP per person and real wages was faster in the later nineteenth century than earlier. The industrial sector became relatively (much) larger and more heterogeneous than it had been during the early years of industrialization. One interesting finding notes that marriage rates became less dependent on short-term economic fluctuations later in the century. He interprets this (and other evidence) as reflecting a transition from an agrarian to an industrial economy.

Mark Spoerer explores the fiscal implications of the Reich’s federal character. By design, the Reich had little taxation power: the member states insisted on this provision to constrain the central government’s powers. This feature also limited the Reich’s ability to engage in costly nation-building. Major initiatives such as social insurance were largely self-funded. Towards the end of the nineteenth century, city and other local governments (Kommunen) assumed responsibility for many new functions, including clean water and sewage and later, provision of gas and electricity. By the 1880s, Prussia’s local governments took in more total tax income than the state itself.

Sebastian Braun and Jan-Otmar Hesse consider the Reich’s impact in an area where one would think a national government could make the most difference: developing and integrating the post, a telegraph system, and the railroad. Considerable effort prior to 1871 had resulted in only partial integration of these services across state boundaries. The Reich quickly created an all-German post office (1871) and, later, a telegraph system, but the railroad network remained largely uncoordinated until after World War I.

Michael Schneider describes the statistical services for the several states and their cooperation under the leadership of the Reich office created in 1872. Larger states such as Saxony and Prussia had long funded services that published often detailed reports on population, the economy, government operations, and other matters. These offices had coordinated to provide some common information such as the Customs Union censuses. But the main story was heterogeneity: smaller, poorer states could not afford the costs of the material churned out by Prussia and others, and different offices adopted conflicting definitions and approaches that reflected, in part, differences in local economies. The Reich office’s initial role was to persuade state offices to collect information in a standard way. Schneider focuses, quite usefully, on the difficulties involved in the census of enterprises (Betriebzählung).

Matthias Morys describes the adoption of the gold standard (1873) and the formation of the first all-German central bank, the Reichsbank (1875). Currency was one area for which the Reich had exclusive authority. Prior to 1871 the German states had, by agreement, simplified their many silver-based monetary systems into two. Morys argues that public opinion broadly favored shifting to the gold standard prior to the Reich, but the new federal entity’s sole legislative competence in this area made the process much easier. The Reichsbank, as Morys notes, was essentially a re-foundation of the Prussian central bank. The central bank at first was one of thirty-three note-issuing banks in the Reich (although the largest by far). As others failed or lost this authority, the Reichsbank’s unique all-German reach made it dominate even more than its purely legal role would imply.

Alexander Donges and Jochen Streb consider an area where the Reich had one of its greatest immediate impacts: patent law. Prior to 1871 the states had different attitudes towards patents. Prussia allowed patents but construed the novelty requirement quite narrowly. Once issued, Prussian patents had a short duration and were rarely renewed. Other states such as Saxony were more liberal in their interpretation of what deserved a patent. While there was widespread agreement on the need for an all-German patent law, the drastically conflicting views required serious compromise. The Reich patent law (1876) reflected Prussia’s narrow interpretation of what could be protected, but permitting repeated renewals.

Carsten Burhop and Felix Selgert take a different approach to the question of 1871, focusing sharply on the years just before and the years just after. By the turn of the twentieth century Germany’s firms could acquire finance from large universal banks or tap extensive equity markets. Burhop and Selgert trace the key steps in this financial system’s development to a process of deregulation in the years just before the Reich’s creation. The North German Confederation adopted general incorporation in 1870. This change, carried into the Reich, resulted in both many new banks organized as corporations, and many new corporations that wanted to access markets for their equities and bonds. Later moves amounted to a partial re-regulation and put remaining large banks at the center of the financial system.

Eva-Maria Roelevink and Dieter Ziegler take a historiographical approach to the question in their title: “How Organized was Capitalism in the Reich?” Their theme harks back to a literature from the 1960s and 1970s that viewed the late-nineteenth century German economy as run by various combinations of firms: lobbying groups (Verbände) that pushed for tariffs and other preferential treatment; cartels that raised prices above competitive levels; and inter-locking directorates and other, less formal connections among firms. The earlier literature argued that competition among firms under these conditions was largely illusory. The authors stress that these views pre-dated the opening of major archives (governmental in the former East Germany, businesses in the former West) and have not held up well to new evidence. In their view, the lobbies, cartels, and interlocking directorates were real and influential, but less so than earlier work claimed.

Tobias Jopp and Jochen Streb discuss social insurance. Bismarck’s complex of health, workplace accident, and old-age insurance (introduced in steps 1883-1891) reflects the specific political considerations of the Reich, but followed older models and reacted in part to unsatisfactory, earlier reform efforts. This chapter also considers the recent literature on how Bismarck’s social insurance affected emigration (German workers became less likely to emigrate, suggesting they valued social insurance); fertility (probably not at all); and savings (for which there is evidence of crowding out).
Thilo Albers and Charlotte Bartels address the evolution of income and wealth distribution during the nineteenth and early twentieth centuries. This chapter faces an especially severe version of the data constraints that shape all economic history, and the authors carefully explain their sources and what those sources can say. They detect three phases: (1) slowly increasing equality into the early 1870s, reflecting both the “grain invasion” and industrialization; (2) more rapid increases reflecting a quicker pace of industrialization to roughly 1890; then (3) a more modest pace of rising inequality. The authors stress the essential role of inequality in the Reich’s politics and economic policies.

Sascha Becker, Francesco Cinnirella, and Erik Hornung describe the growth of the German educational system from the early nineteenth century. The strong role of religious institutions in education meant that even in the early nineteenth century, Germany’s Protestant areas had higher levels of schooling than its Catholic areas. Protestant areas also enjoyed smaller male/female gaps in educational attainment. By the mid-nineteenth century, several German states had enrollment figures meeting or exceeding most other countries in the world, and the system improved still more later in the nineteenth century. The authors argue that Germany’s well-educated workforce played an important role in the economic development of the higher-tech sectors of the “second industrial revolution.”

Wolf-Fabian Hungerland and Markus Lampe provide a rich overview of Germany’s international trade in this period. (“International” means “crossing the borders of the Customs Union.”) The data become much better after 1871, making the Reich’s direct impact on trade hard to study. Important policies such as tariffs and non-tariff barriers were important tools after 1871, but they had been before, as well. Hungerland and Lampe do a valuable service in stressing aspects of Germany’s international trade that get lost in simple tales. Germany’s most important trading partners were the United Kingdom and other developed areas of western Europe. Most trade was intra-industry.

Four final chapters offer comparative perspectives. Jean-Pierre Dormois stresses strong similarities in the motivations for the relatively high tariffs introduced in 1879 (Germany) and France (1892). Dormois argues that tariffs in this period reflect revenue concerns at least as much as efforts to protect particular sectors, a claim supported by the targets of these tariffs: Germany had no banana producers to protect. His claims that tariff protection was ultimately futile, however, may over-state his case.

Giovanni Federico’s account of Italian unification offers a clear account of the political history of unification and the institutional changes that followed. His comparative remarks on German unification stress differences. Italy had no Prussia; Sardinia-Piedmont, the closest thing to an Italian Prussia, had only 3.2 million people in 1860. While Italians had discussed a customs union inspired by Germany’s Customs Union, the proposals never led to action. One reason may have been the relatively weak incentives to trade within Italy. The newly unified Italian state adopted many new laws and institutions by adopting what existed already in Sardinia, and instead of a federal structure, moved to a highly-centralized, unitary state more like France than the Reich. Federico argues that any economic effects from unification per se reflect a long-term process of change brought about by institutional changes and other indirect effects such as better internal transport.

Max-Stefan Schulze provides a comparison from the Dual Monarchy. This discussion focuses on growth of economic aggregates and growth accounting exercises. Schulze stresses recent findings that rehabilitate Austria-Hungary from an older view that its economic performance was always weaker in the nineteenth century; Hungary, less developed than either Austria or the Reich, enjoyed faster productivity growth 1870-1910 than either. The chapter concludes with a brief discussion of regional issues covered in more detail in the author’s other publications (for example, Max-Stephan Schulze and Nikolaus Wolf, “On the Origins of Border Effects: Insights from the Habsburg Empire,” Journal of Economic Geography 9, no. 1 (2009): 117-136).

Nicholas Crafts compares the economic performance of the British and German economies in the period 1870-1914. The great theme is Britain’s putative “entrepreneurial failure,” a comparison that is apt because the literature usually stresses Britain’s performance relative to Germany. Crafts is the undisputed master of this and related material; for a recent overview, see his Forging Ahead, Falling Behind, and Fighting Back (Cambridge University Press, 2018).

So what did 1871 mean to the German economy? A natural way to consider 1871 is to consider an explicit counter-factual. For example, we could imagine a region dominated by a Prussian-led North German Confederation with independent, smaller states such as Bavaria remaining aloof. Curiously, only a few chapters even nod in this direction. Morys, for example, notes that in the absence of the Reich, the Prussian central bank would have enjoyed the dominant position in all of the German states that the Reichsbank actually acquired. While little more than a remark here, this kind of thinking raises the question of whether Prussia’s size and weight would have led to similar economic integration through the looser ties of the Customs Union and other inter-state agreements. This kind of thinking arises in many earlier discussions of German unification and deserves more attention than it receives here. None of the authors here ventures to say that the Reich had a particular overall impact, but it would have been nice to see some discussion of what was really just Prussian (for example).

This review reflects the German-language text cited above. An English version will appear soon in the Routledge series “Explorations in Economic History.” Anyone interested in modern German economic history will want to read this collection. Those interested in the comparative history of related topics will find these chapters both a great overview and an introduction to the research literature. Instructors in advanced undergraduate or graduate courses will want to use it to supplement the growing journal-article literature. Federico’s contribution on Italian unification will be especially valuable in teaching. In either language, this collection deserves a wide readership and the editors our gratitude.

Timothy W. Guinnane is the Philip Golden Bartlett Professor of Economic History in the Department of Economics at Yale University. Recent publications include “The Introduction of Bismarck’s Social Security and System and its Effects on Marriage and Fertility in Prussia” (with Jochen Streb) Population and Development Review, 2021, and “Creating a New Legal Form: the GmbH,” Business History Review, 2021.

Copyright (c) 2021 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (October 2021). All EH.Net reviews are archived at http://www.eh.net/BookReview.