Economic history of Germany

Until the early 19th century, Germany, a federation of numerous states of varying size and development, retained its pre-industrial character, where trade centered around a number of free cities.

[20] Beginning with an agreement of the cities of Lübeck and Hamburg, guilds cooperated in order to strengthen and combine their economic assets, like securing trading routes and tax privileges, to control prices and better protect and market their local commodities.

Important centers of commerce within the empire, such as Cologne on the Rhine river and Bremen on the North Sea joined the union, which resulted in greater diplomatic esteem.

Human power became a rare commodity and the social and economic situation of average workers improved for several decades as employers were forced to pay higher wages.

[25][26] The early-modern European society gradually developed after the disasters of the 14th century as religious obedience and political loyalties declined in the wake of the Great Plague, the schism of the Church and prolonged dynastic wars.

As a consequence Germany's society remained stagnant as its economy played only a secondary role with limited access to international markets and resources, while in France, Britain and the Netherlands, worldwide trade and colonial possessions greatly empowered mercantile and industrial groups and led to the rise of a bourgeoisie, who was able to benefit from the new economic opportunities.

[31][32][33] The Thirty Years' War (1618–1648) was ruinous to the twenty million civilians and set back the economy for generations, as marauding armies burned and destroyed what they could not seize.

[37] Peasant leaders supervised the fields and ditches and grazing rights, maintained public order and morals, and supported a village court which handled minor offenses.

Prussia abolished serfdom with the October Edict of 1807, which upgraded the personal legal status of the peasantry and gave them the chance to purchase for cash part of the lands they were working.

Domination by modernizing France during the era of the French Revolution (1790s to 1815) produced important institutional reforms, including the abolition of feudal restrictions on the sale of large landed estates, the reduction of the power of the guilds in the cities, and the introduction of a new, more efficient commercial law.

[42] From the 1830s and 1840s, Prussia, Saxony, and other states reorganized agriculture, introducing sugar beets, turnips, and potatoes, yielding a higher level of food production that enabled a surplus rural population to move to industrial areas.

The takeoff stage of economic development came with the railroad revolution in the 1840s, which opened up new markets for local products, created a pool of middle managers, increased the demand for engineers, architects and skilled machinists, and stimulated investments in coal and iron.

[43] The political decisions about the economy of Prussia (and after 1871, all of Germany) were largely controlled by a coalition of "rye and iron", that is the Junker landowners of the east and the heavy industry of the west.

[50] Bismarck further won the support of both industry and skilled workers by his high tariff policies, which protected profits and wages from American competition, although they alienated the liberal intellectuals who wanted free trade.

[56] Germany became Europe's leading steel-producing country in the late-19th century, thanks in large part to the protection from American and British competition afforded by tariffs and to cartels.

[73] Germany exploited its own natural resources and those of its occupied territories to fill the import gap caused by the British blockade, while neutral neighbors like the Netherlands and the Scandinavian nations exported crucial foodstuffs like wheat to keep the German population fed.

There were some commodities, like rubber, cotton, and nitrates (Saltpeter), which Germany could not easily substitute from within, and which it could not obtain from its neutral trading partners because the Allies classified them as contraband.

The freezing 'Turnip Winter' of 1916-17 only compounded the growing subsistence problem; wheat and potato crops failed and Germans had to turn to turnips to satisfy their nutritional needs, a vegetable previously used for livestock feed.

War reparation obligations reduced investment propensity and, perhaps most importantly, the government implemented a rigid austerity policy (motivated partially out of a common concern at the time that devaluation would lead to inflation)[85][86][87] that resulted in deflation.

[88][89] While this policy likely only aggravated Germany's economic crisis by a limited degree, its means of implementation created discontent amongst the German populace and resulted in increased political radicalisation.

[92] As unemployment reached very high levels, the National Socialists accumulated government power and began to pursue their policies against the Jewish minority, political leftists and many other groups.

By 1950, after the virtual completion of the by then much watered-down "level of industry" plans, equipment had been removed from 706 manufacturing plants in western Germany and steel production capacity had been reduced by 6,700,000 tons.

This process was aided by a sharp increase in human and physical capital accumulation, a pro-growth government policy, and the effective utilization of the education sector to create a more productive work force.

Moreover, the West German federal government and the states (Länder; singular, Land) began to compensate for irregularities in economic cycles and for shifts in world production by beginning to shelter and support some sectors and industries.

That law, which remains in effect although never again applied as energetically as in Schiller's time, provided for coordination of federal, Land, and local budget plans in order to give fiscal policy a stronger impact.

He was one of the rare German Keynesians, and he brought to his new tasks the unshakable conviction that government had both the obligation and the capacity to shape economic trends and to smooth out and even eliminate the business cycle.

Schiller's chosen formula was Globalsteuerung, or global guidance, a process by which government would not intervene in the details of the economy but would establish broad guidelines that would foster uninterrupted noninflationary growth.

Social program costs grew by over 10 percent a year during much of the 1970s, introducing into the budget an unalterable obligation that reduced fiscal flexibility (although Schiller and other Keynesians believed that it would have an anticyclical effect).

The government also carried through a series of privatization measures, selling almost DM10 billion (for value of the deutsche mark—see Glossary) in shares of such diverse state-owned institutions as VEBA, VIAG, Volkswagen, Lufthansa, and Salzgitter.

Economists Snower and Merkl (2006) suggest that the malaise was prolonged by all the social and economic help from the German government, pointing especially to bargaining by proxy, high unemployment benefits and welfare entitlements, and generous job-security provisions.