German Economic History


Figure 1.--As a result of the German hyper-inflation, paper Marks were not accepted as payment. Even schools were affected. Children at this school were asked to pay their school fees for the opening of the school year in other forms. The school accepted payment in all sorts of goods other than Weimar paper currency. Here a teacher in a rural school near Berlin about 1923 is registering the children, who are paying with sacks of wheat, potatoes, eggs, and other items. As a result of the hyper-inflation, the savings of the middle-class were destroyed. This significantly undercut moderate support for the new Republic. The destruction of the Mark and the need for fiscal responsibility still resonates with the German people. Notice the map on the wall with the old pre-World War I borders.

Germany is the heart of Europe in both a geographic and economic sence. Germany as part of the European Union is today the driving force in the European economy. The Germany economy since the fall of Rome has been important, but not dominant in the European economy. Germany was prevented from dominating Europe when during the medieval Europe unlike surronding ststes, a unified German state did not coalese because of differences between the imperial government and the papacy which empowered thecGerman princes to establish their own nation states. This politicial division had economic consequences. After the Napoleonic Wars as Germany moved toward unification, the industrial revolution which fundamentally transforned Britain began to take hold in Germany. This led to a period of rapid growth, especially in western Germabny centered on the Ruhr Valley. Rapid economic growth and associated social transformatiion brought with it some destabilizing consequences. Germany transsformed it self from a conservative agrarian society to a modern industrial society. This change occurred on a regiojnal basis. Much of Germany, particularly eastern Germany remained agrarian and traditional. The industrial revolution proceeeded differently in Germany than Western Europe, especially Britain and America. There was a much greater level of government control and regulation. The economic outlook which developed in Germany as a result of the greater government role has shaped modern German policies and played a role in German support for international economic integration. Even before political unification, the German states began moving toward economic union through the Zollverein and customs unions. The Zollverein was in fact the first critical step toward German unification. It was crucial stimulant for economic development as Germany wasindustrializing. It helped created need markets for expanding industrial firms. German was unified by Prussia and the Hohenzollerns. This meant that the ruling elite included Germans with many traditioinal values, including Prussian militarism. And the industrial power of Germany gave the conservative German elites with values different than the emerging democratic states to the west enormous power. At the same time, the German working class was being radicalized with Marxist doctrine. This created substantial social disparities between modern cities and conservative small towns and rural areas. Unification and the establishment of Imperial Germany (the Second Reich) to standardize trade regulations on a national basis, although the Germn states still retained considerable authority. A national currency system, the Deutches Mark based on the gold standard, was a another key step. One economist writes, The German states “cleared a path to an international currency unification on the gold basis, which for the whole period up to the World War proved of the greatest importance for the rapid expansion of world trade.” The German imperial monarchy influebced by the Prussiam military tradition chose to convert a Balkan crisis into a world war (1914). The War demolished the evolving European economic system. German economic instability after the war (1920s), partially due to the punative Versailles Treaty and the Depression (1930s) led to another German military attempt to dominate Europe, this time with horrendous racial goals. In the aftermath, tghe future of Germany and Europe itself was at issue. The choice was between the Soviet totalitarian, Marrxist model and the American democratic capitalist model. The issue was decided by the free market policies adopted by German politicans and American occupation authorities. The result was the German Economic Miracle (1950s) and the move toward European unification (1960s) which had led to the European Union.

Ancient Germany


Medieval Germany

The Germany economy since the fall of Rome has been important, but not dominant in the European economy. Germany was prevented from dominating Europe when during the medieval Europe unlike surronding ststes, a unified German state did not coalese because of differences between the imperial government and the papacy which empowered thecGerman princes to establish their own nation states. This politicial division had economic consequences.

Industrial Revolution

After the Napoleonic Wars as Germany moved toward unification, the industrial revolution which fundamentally transforned Britain began to take hold in Germany. This led to a period of rapid growth, especially in western Germany centered on the Ruhr Valley with its huge coal resources. Rapid economic growth and associated social transformatiion brought with it some destabilizing consequences. Germany transsformed it self from a conservative agrarian society to a modern industrial society. This change occurred on a regiojnal basis. Much of Germany, particularly eastern Germany remained agrarian and traditional. The industrial revolution proceeeded differently in Germany than Western Europe, especially Britain and America. There was a much greater level of government control and regulation. The economic outlook which developed in Germany as a result of the greater government role has shaped modern German policies and played a role in German support for international economic integration.

Zollverein (1818-66)

Even before political unification, the German states began moving toward economic union through the Zollverein or custom union. The Zollverein was in fact the first critical step toward German unification. The Zollverein was a coalition of independent German states commited to loweing customs and coordinating economic policies. The Zollverein was founded (1818). Before this Prussia was a largely agricultural and relsatively poor European state, albeit with a well organized military. It was from tge beginning a coalition ceneted around Prussia and Hohenzollern territories. It help connect the disparate, non-contiguous territories of the Hohenzollerns. It gradually expanded to include most of the German states. The Zollverein was a crucial stimulant for economic development as Germany was industrializing. It helped created need markets for expanding industrial firms. The Zollverein played a major role in the industrialization of the German states. Britain was the undisputed industriall powerhouse in the early 19th century, but Gradually Germany emerged as an economic powerhouse to rival the British. This radically chsnged the Ruropean balamce of poeer, although it was not initally clearly apparent because there was no unified German state. Austria saw the Zollverein as a Prussian institution and insisted in high taroff barriers to protect its industry. The impact was, however, to promote the growth of indusyry in Prussian and other German states while the protected Austrian industry languished. (This is not unlike what occurred during the Cold War.) The ecoomomic issues also exacerbated the Austrian-Prussian rivakry within Germany.

North German Confederation (1868)

The Austrian-Prussian rivalry led to increasing tensions (1850s-60s) and ultimately tp the Austro-Prussian War (1866). The Prussians after defeating Austria, but under Chancelor Bismarck's diplomacy made few few territotial demands on Austria. This meant that Prussia could in the future sign agreements with a friendly Austria. The Orussians did, however, make demands on the German states which sided with the Austrains. This considerablt strengthened Prussia. The Prussians did exclude Austria from Germany. They then founded the North German Confederation (1868). This was essentially an expanded Zollverein, They also began negotiating economic agreements with non-German states like Luxembourg and Sweden.

Imperial Germany (1871-1918)

German was unified by Prussia and the Hohenzollerns. This meant that the ruling elite included Germans with many traditioinal values, including Prussian militarism. And the industrial power of Germany gave the conservative German elites with values different than the emerging democratic states to the west enormous power. At the same time, the German working class was being radicalized with Marxist doctrine. This created substantial social disparities between modern cities and conservative small towns and rural areas. Unification and the establishment of Imperial Germany (the Second Reich) to standardize trade regulations on a national basis, although the Germn states still retained considerable authority. A national currency system, the Deutches Mark based on the gold standard, was a another key step. One economist writes, The German states “cleared a path to an international currency unification on the gold basis, which for the whole period up to the World War proved of the greatest importance for the rapid expansion of world trade.” German unification placed the industrial power house created in part by the Zollverein within one single nation state. The German imperial monarchy influenced by the Prussiam military tradition chose to convert a Balkan crisis into a world war (1914). Imperial Germany was a capitalist country, but it was not a free market economy. The Imperial Government had enormous influence and used it to pursue an industrial policy to direct development in certain areas seen as beneficial in developing national power as well as military considerations.

World War I (1914-18)

Many analysts believe that European economies had become so interdependent that war was no longer possible. German unification had meant that most of Europe was controlled by three great empires (Austria-Hungary, Germany, and Russia). This of course simplied trade matters. The optimistic observatios proved terribly wrong. World War I proved to be a war of epic proportions. It desimated an entire generation. It also demolished the evolving European economic system. Germany was the single most important industrial power in Europe. German industry was not, however, more important than the combined Allied industrial capacity. And Germany was very dependant on international trade, the same international system that the War tore asunder. As the war progressed, the German military essentially took over the economy and directed the economy. The Imperial Government played a greater role in the German economy than was the case of America, Britain, and France befote the War, but it was a limitedcrole compared to what occured during the War. The German economy proved to be a major weakness. Germany hoped to win a short war. When the Schliffen Plan failed, the stalemate in the West meant that the superior economic resources of the Allies slowly began to grind down Germany. The country was not self-sufficent in food. And the Royal Navy maritime blockade meant that food could not be imported. In addition, Germany could not importthe raw materials needed by industry. There was some hope of exploiting the reources of the East, especially after the Russians were defeated. Hermany by 1918 was in a desperate state. Allied industry was outproducuing the Germans and food shortages were undermining the Home Front. Unfortunately for Germany, theur decesion to reinstiture unconditional sunmarine warfare brought America into the War. When the final German Spring offensive failed (1918), the American Expeditionary Force (AEF) and enlarged Brituish Army, gave the Allies the strength to finally crack the Hindenberg Line wide open and forcing the German military to seek and armistics..

Weimar Republic (1918-33)

Few democratic governments have faced such turbulent economic times ans political challenges as the Weimar Republic. The Weimar Republic emerged out of the defeat of the German Army when the Allies reinforced by the Americans launched the war-winnning 100 Days Offensive. The German people who only a few months earlier had experiebed victory in the East now were faced with defeat. (Rightist parties were to claim after the War that the German Army was not defeated in the field, but stabbed in the back by Socialists--some of whom were Jews.) The Allied naval blockade had already severly reduced food supplies. The most needy part of the population was nearing starvation. The first challenge was Communist revolution in Berlin, Munich, and other areas. The name Weimar Republic comes from the fact that it was not safe to establish the Government in Berlin. The Allies in the Versailles Peace Treaty forced substantial reparations on a defeated Germany, but did not occupy the country. The reparations are today seen as a serious miscalculation, although it has to be pointed out that it was the kind of hard peace that Germany forced upon the countries it had defeated. Germany also lost territory under the Versailles Treaty, but retained its industrial centers. Historians and economists still debate the impact of the reparations. It is clear that the reparations weakened German finances. It is also clear that German chancellors manipulated reparations payments to force a revision of the Versailles Treaty. Weimar officials claimed that they could no longer afford the reparations payments. The Government defaulted on some payments. The Allies, especially the French were intent on receiving the payments needed to repair the massive war damage. French and Belgian troops occupied the Ruhr--Germany's industrial heart. They took control of most mining and manufacturing companies (January 1923). The Germans called strikes to prevent the Allies from benefitting economically. The Government incouraged passive resistance to the occupation. The strikes lasted 8 months and were extremely damaging to the German economy. The strike meant that goods were not produced for both the domestic economy and to export. The French, became increasingly frustrated. There were incidents where strikers were shot. They also arrested and exiled strike leaders. who began to kill and exile protestors. The most serious impact of the crisis was on Germany itself. The German Government supported the strikes, primarily by paying benefits to the strikers. Government income was sharply reduced by the strike at the same time that expenditures were increased by the benefits paid by strikers. The Government accomplished this by printing currency givng rise to hyperinflation. The inflation was fed by the facts that as a result of the strike there were fewer goods produced. Germans soon found that the Mark was worthless. As a result, the savings of the middle-class were destroyed. This significantly undercut moderate support for the new Republic. It is a pheomenon that haunts German politics and explains why German Governments are more financially responsible than many other European Governments. The United States stepped in to support the Weimar Republic with Plan which provided the huges loans which in effect financed the reparations payments (1924). It was the beginning of a foreign debt burden that successive German Governments saddled Germany to pay the reparations. What followed were the Weimar Golden Years (1924-29), but even during this period, growth rates were not impressive. The United States offered further support wuith the Young Plan (1929). The Wall Strreet Crash (October 1929) changed the politucal dynamic. The United States wanted the loans paid bavk to support its reeling economy and refused to make further loans. Chancellor Heinrich Brüning adopted an austerity program (1930-32) which fed the political radicalism that brought Hitler and the NAZIs to power and a renewed effort to dominate Europe militarily.

The Depression (1929-35)

The Depression spanned the end of the Weimar Republic and the beginning of the NAZI era. The Depression played an important role in the NAZI sizure of power and in the image that Hitler built in Germany once he seized power. Tragically for Germany, the most serious period of the depression followed the New York Stock Market crash (1929) through Hitler's seizure of power (1933). The impact that the Depression had on Germany folded neatly into Hitler's political drive for power. Apparent economic improvements in Germany were an important element in Hitler's real popularity after seizing power. The view of the Hitler and the NAZIs in Europe was substantially different in Europe during the 1930s before Hitler launched World War II than it is today. It should be remembered that until Kristallnacht (November 1938) that NAZI actions against the Jews were not greatly different fom how Blacks were treated in the American South. In fact many NAZI racial laws were based on laws enacted against Blacks by Southern state legislatures. There were prominent Americans (Lindberg, Ford, and others) before World War II who were impressed with the NAZIs. Hitler was seen by many as the most dynamic leader in Europe. One reason for this was that NAZI policies essentially ended the depression by 1935. Many Germans had turned to the NAZIs in the earlt 1930s because of the Depression. The NAZIs expanded German labor programs, creating a National Labor Service must like the American CCC. The NAZIs seized control of the economy. German industrialists benefitted and soon learned that it was very dangerous to defy the Government. It might be argued that Germany under the NAZIs had the most controlled economy in Europe. Their major project was the construction of the Autobauns. The massive new armaments program was a major factor in putting Germans back to work. The German GNP was back to pre-Depression levels by 1935. NAZI policies made sure there was no longer wide-spread unemployment and destitution in Germany. The German people, however, were not better off. The benefits of the expanding economy was not brought to them in terms of more consumer goods, but rather a rearmed military. Many Germans, however, were convinced that they were better off. This was in part due to declinging product standards. It was also a result if the effectiveness of NAZI propaganda which emphasized the increased international respect with which Germany had achieved. [Hanby]

NAZI Era (1933-45)

It was very common even before World War II to read about an a Gernman economic miracle. Many in the 1930s lauded the NAZI achievement in ending the Deopression. Other of course envied the Soviet Union. This is perhaps understandable in the 1930s when it was not entirely clear what was going on in those countries. Wha is surprising is that we still see some authors blinkered by ideology and often adding outriht falsehoods still talking about the NAZI achievement. Here is a typical example, "The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began. In fact, German economic recovery preceded and later enabled German rearmament, in contrast to the US economy, where constitutional roadblocks placed by the US Supreme Court on the New Deal delayed economic recovery until US entry to World War Two put the US market economy on a war footing." [Liu] The author is wrong that the NAZIs did not begin to re-militarize at an early point. He is also wrong that reparations were a major problem. In fact te Germans payed very little in the way of repsarations. Most of the payments they made were funds borrowed from America and at the oriinal reparations required in the Versailles Treaty were postponed. It is true thst Hitler put erman workers to work. It is also true that the real wages (purchasing power) of German weorkers declined. And by the time that Hitler launched the War that the NAZI state was near bankruptsy. The German people had after the War lived under NAZI price controls and subsequently rationing when the War began. The NAZIs first imposed price controls (1936). This allowed the Goivernent to re-militarize with materials purchased at prices below market levels. Hitler placed Reichmarshal Hermann Goering incharge of the war ecnomy (1939). He imposed rationing. NAZI rationing was at first limited because the food of production of the occupied countries could be looted. Draconian punishments faced Germans violating the police control regulations.

Cold War (1945-89)

In the aftermath of World War II, the future of Germany and Europe itself was at issue. The choice was between the Soviet totalitarian, Marrxist model and the American democratic capitalist model. The issue was decided by the free market policies adopted by German politicans and American occupation authorities. Soviet authorities as well as Socialist politicans and labor unions in the West opposed the reforms which were designed to create a strong Deutch Mark. The currency reforms for Soviet officiasls was the final straw leading to a formal break in any effort to cooperate in the occupation of Germany. The result was the German Economic Miracle (1950s). The economic failure of Communist East Germany was in stark contrast to the success of capitalusm in the west. This was largely ignored in the developing world with tragic consequences, but it played a major role in Europe whuich from the beginning wsas the kedy basttle ground of the Cold War.

European Unification

West Germany was the critical partner with France to pursue European unification which had led to the European Union.

Sources

Hanby, Alonzo. For the Survival of Democracy.







CIH








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Created: 7:16 PM 7/15/2010
Last updated: 5:50 PM 4/12/2015