Economic history of Germany
Encyclopedia
Germany before 1800 was heavily rural, with some urban trade centers. In the 19th century it began a stage of rapid economic growth and modernization, led by heavy industry. By 1900 it had the largest economy in Europe, a factor that played a major role in its entry into World War I
and World War II
. Devastated by World War II, West Germany became an "economic miracle" in the 1950s and 1960s with the help of the Marshall Plan
. Currently it is the largest individual economy in the EU with GDP of roughly 3 trillion USD .
Medieval Germany
, lying on the open Northern European Plain, was divided into hundreds of contending kingdoms, principalities, dukedoms, bishoprics, and free cities. Economic survival in that environment, like political or even physical survival, did not mean expanding across unlimited terrain, as in the United States
. It meant a constant struggle that required collaboration with some, competition with others, and an intimate understanding among government, commerce, and production. A desire to save was also born in the German experience of political, military, and economic uncertainty.
under the control of nobles and monasteries. A few towns were starting to emerge. From 1100, new towns were founded around imperial strongholds, castles, bishops' palaces and monasteries. The towns began to establish municipal rights and liberties (see German town law
). Several cities such as Cologne
became Imperial Free Cities, which did not depend on princes or bishops, but were immediately subject to the Emperor. The towns were ruled by patricians (merchants carrying on long-distance trade). The craftsmen formed guilds, governed by strict rules, which sought to obtain control of the towns; a few were open to women. Society was divided into sharply demarcated classes: the clergy, physicians, merchants, various guilds of artisans; full citizenship was not available to paupers. Political tensions arose from issues of taxation, public spending, regulation of business, and market supervision, as well as the limits of corporate autonomy.
Cologne's
central location on the Rhine river placed it at the intersection of the major trade routes between east and west and was the basis of Cologne's growth. The economic structures of medieval and early modern Cologne were characterized by the city's status as a major harbor and transport hub upon the Rhine. It was governed by its burghers.
, under the leadership of Lübeck
.
It was a business alliance of trading cities and their guilds that dominated trade along the coast of Northern Europe
and flourished from the 1200 to 1500, and continued with lesser importance after that. The chief cities were Cologne
on the Rhine River, Hamburg
and Bremen
on the North Sea, and Lübeck on the Baltic.
The Hanseatic cities each had its own legal system and a degree of political autonomy.
and Württemberg
regions especially hard hit. It took generations for Germany to fully recover.
The emancipation of the serfs came in 1770-1830, beginning with Schleswig in 1780. 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. They could also sell the land they already owned. The edict applied to all peasants whose holdings were above a certain size, and included both Crown lands and noble estates. The peasants were freed from the obligation of personal services to the lord and annual dues. A bank was set up so that landowner could borrow government money to buy land from peasants (the peasants were not allowed to use it to borrow money to buy land until 1850). The result was that the large landowners obtained larger estates, and many peasant became landless tenants, or moved to the cities or to America. The other German states imitated Prussia after 1815. In sharp contrast to the violence that characterized land reform in the French Revolution, Germany handled it peacefully. In Schleswig the peasants, who had been influenced by the Enlightenment, played an active role; elsewhere they were largely passive. Indeed, for most peasants, customs and traditions continued largely unchanged, including the old habits of deference to the nobles whose legal authority remains quite strong over the villagers. Although the peasants were no longer tied to the same land like serfs had been, the old paternalistic relationship in East Prussia lasted into the 20th century..
in the west through Prussia in the east. They also had coal and iron in the Ruhr Valley. Through the practice of primogeniture
, widely followed in northern Germany, large estates and fortunes grew. So did close relations between their owners and local as well as national governments.
The south German states were relatively poor in natural resources and those Germans therefore engaged more often in small economic enterprises. They also had no primogeniture rule but subdivided the land among several offspring, leading those offspring to remain in their native towns but not fully able to support themselves from their small parcels of land. The south German states, therefore, fostered cottage industries, crafts, and a more independent and self-reliant spirit less closely linked to the government.
The first German cartel was a salt cartel, the Neckar Salt Union of 1828, formed in Württemberg
and Baden
. The process of cartelization began slowly, but the cartel movement took hold after 1873 in the economic depression that followed the postunification speculative bubble. It began in heavy industry and spread throughout other industries. By 1900 there were 275 cartels in operation; by 1908, over 500. By some estimates, different cartel arrangements may have numbered in the thousands at different times, but many German companies stayed outside the cartels because they did not welcome the restrictions that membership imposed.
The government played a powerful role in the industrialization of the German Empire
founded by Otto von Bismarck
in 1871 during a period known as the Second Industrial Revolution
. It supported not only heavy industry but also crafts and trades because it wanted to maintain prosperity in all parts of the empire. Even where the national government did not act, the highly autonomous regional and local governments supported their own industries. Each state tried to be as self-sufficient as possible.
Despite the several ups and downs of prosperity and depression that marked the first decades of the German Empire, the ultimate wealth of the empire proved immense. German aristocrats, landowners, bankers, and producers created what might be termed the first German economic miracle, the turn-of-the-century surge in German industry and commerce during which bankers, industrialists, mercantilists, the military, and the monarchy joined forces.
Bismark built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s he introduced old age pensions, accident insurance, medical care and unemployment insurance that formed the basis of the modern European welfare state. His paternalistic programs won the support of German industry because its goals were to win the support of the working classes for the Empire and reduce the outflow of immigrants to America, where wages were higher but welfare did not exist. 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.
summed up the advantages to be derived from the development of the railway system in 1841:
Lacking a technological base at first, the Germans imported their engineering and hardware from Britain, but quickly learned the skills needed to operate and expand the railways. In many cities, the new railway shops were the centres of technological awareness and training, so that by 1850, Germany was self-sufficient in meeting the demands of railroad construction, and the railways were a major impetus for the growth of the new steel industry. Observers found that even as late as 1890, their engineering was inferior to Britain’s. However, German unification in 1870 stimulated consolidation, nationalisation into state-owned companies, and further rapid growth. Unlike the situation in France, the goal was support of industrialisation, and so heavy lines crisscrossed the Ruhr and other industrial districts, and provided good connections to the major ports of Hamburg and Bremen. By 1880, Germany had 9,400 locomotives pulling 43,000 passengers and 30,000 tons of freight, and pulled ahead of France
, a war it was to lose and one that spawned many of the economic crises that would destroy the successor Weimar Republic
. British economist John Maynard Keynes
denounced the 1919 Treaty of Versailles
as ruinous to German and global prosperity. The war and the treaty were followed by the Great Inflation of the early 1920s that wreaked havoc on Germany's social structure and political stability. During that inflation, the value of the nation's currency, the Papiermark
, collapsed from 8.9 per US$1 in 1918 to 4.2 trillion per US$1 by November 1923. Then, after a brief period of prosperity during the mid-1920s, came the Great Depression
, which fostered the social insurrection that fascist candidate Adolf Hitler
capitalized on in order to win the 1933 election for German Chancellor.
During the Hitler era (1933-45), the economy developed a hothouse prosperity, supported with high government subsidies to those sectors that tended to give Germany military power and economic autarky
, that is, economic independence from the global economy. During the war itself the German economy was sustained by the exploitation of conquered territories and peoples
. With the loss of the war, the country entered into the period known as Stunde Null
("Zero Hour"), when Germany lay in ruins and the society had to be rebuilt from scratch.
The man who took full advantage of Germany's postwar opportunity was Ludwig Erhard
, who was determined to shape a new and different kind of German economy. He was given his chance by United States officials, who found him working in Nuremberg
and who saw that many of his ideas coincided with their own. A PhD in economics, he was influenced by the Austrian School
.
Erhard's first step was currency reform: the abolition of the Reichsmark
and the creation of a new currency, the Deutsche Mark
. He carried out that reform on 21 June 1948, installing the new currency with the concurrence of the Western Allies but also taking advantage of the opportunity to abolish most Nazi
and occupation rules and regulations in order to establish the genesis of a free economy. The currency reform, whose purpose was to provide a respected store of value and a widely accepted legal tender, succeeded brilliantly. It established the foundations of the West German economy and of the West German state
was eagerly adopted in Germany as a way to modernize business procedures and utilize the best practices, while these changes were resisted in Britain. Britain's historic lead in productivity of its services sector was based on external economies of scale in a highly urbanized economy with an international orientation. On the other hand the low productivity in Germany was caused by the underdevelopment of services generally, especially in rural areas that comprised a much larger sector. As German farm employment declined sharply after 1950 thanks to mechanization, catching-up occurred in services. 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.
," to show that the system as it has developed after World War II has both a material and a social—or human—dimension. They stress the importance of the term "market" because after the Nazi experience they wanted an economy free of state intervention and domination. The only state role in the new West German economy was to protect the competitive environment from monopolistic or oligopolistic tendencies—including its own. The term "social" is stressed because West Germans wanted an economy that would not only help the wealthy but also care for the workers and others who might not prove able to cope with the strenuous competitive demands of a market economy. The term "social" was chosen rather than "socialist" to distinguish their system from those in which the state claimed the right to direct the economy or to intervene in it.
Beyond these principles of the social market economy, but linked to it, comes a more traditional German concept, that of Ordnung
, which can be directly translated to mean order but which really means an economy, society, and policy that are structured but not dictatorial. The founders of the social market economy insisted that Denken in Ordnungen—to think in terms of systems of order—was essential. They also spoke of Ordo-Liberalismus because the essence of the concept is that this must be a freely chosen order, not a command order.
Over time, the term "social" in the social market economy began to take on a life of its own. It moved the West German economy toward an extensive social welfare system that has become one of the most expensive in the world. Moreover, the West German federal government and the states (Länder ; sing., 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. In an even greater departure from the Erhard tradition, the government became an instrument for the preservation of existing industries rather than a force for renewal. In the 1970s, the state assumed an ever more important role in the economy. During the 1980s, Chancellor Helmut Kohl
tried to reduce that state role, and he succeeded in part, but German unification again compelled the German government to assume a stronger role in the economy. Thus, the contradiction between the terms "social" and "market" has remained an element for debate in Germany.
Given the internal contradiction in its philosophy, the German economy is both conservative and dynamic. It is conservative in the sense that it draws on the part of the German tradition that envisages some state role in the economy and a cautious attitude toward investment and risk-taking. It is dynamic in the sense that it is directed toward growth—even if that growth may be slow and steady rather than spectacular. It tries to combine the virtues of a market system with the virtues of a social welfare system.
; the stimulus to German industry provided by the diversion of other Western resources for Korean War
production; and the German readiness to work hard for low wages until productivity had risen. But the essential component of success was the revival of confidence brought on by Erhard's reforms and by the new currency.
The West German boom that began in 1950 was truly memorable. The growth rate of industrial production was 25.0 percent in 1950 and 18.1 percent in 1951. Growth continued at a high rate for most of the 1950s, despite occasional slowdowns. By 1960 industrial production had risen to two-and-one-half times the level of 1950 and far beyond any that the Nazis had reached during the 1930s in all of Germany. GDP rose by two-thirds during the same decade. The number of persons employed rose from 13.8 million in 1950 to 19.8 million in 1960, and the unemployment rate fell from 10.3 percent to 1.2 percent.
Labor also benefited in due course from the boom. Although wage demands and pay increases had been modest at first, wages and salaries rose over 80 percent between 1949 and 1955, catching up with growth. West German social programs were given a considerable boost in 1957, just before a national election, when the government decided to initiate a number of social programs and to expand others.
In 1957 West Germany gained a new central bank
, the Deutsche Bundesbank
, generally called simply the Bundesbank, which succeeded the Bank Deutscher Länder and was given much more authority over monetary policy. That year also saw the establishment of the Bundeskartellamt
(Federal Cartel Office), designed to prevent the return of German monopolies and cartels. Six years later, in 1963, the Bundestag
, the lower house of Germany's parliament, at Erhard's urging established the Council of Economic Experts to provide objective evaluations on which to base German economic policy.
The West German economy did not grow as fast or as consistently in the 1960s as it had during the 1950s, in part because such a torrid pace could not be sustained, in part because the supply of fresh labor from East Germany was cut off by the Berlin Wall
, built in 1961, and in part because the Bundesbank became disturbed about potential overheating and moved several times to slow the pace of growth. Erhard, who had succeeded Konrad Adenauer
as chancellor, was voted out of office in December 1966, largely—although not entirely—because of the economic problems of the Federal Republic. He was replaced by the Grand Coalition consisting of the Christian Democratic Union
(Christlich Demokratische Union—CDU), its sister party the Christian Social Union
(Christlich-Soziale Union—CSU), and the Social Democratic Party of Germany
(Sozialdemokratische Partei Deutschlands—SPD) under Chancellor Kurt Georg Kiesinger
of the CDU.
Under the pressure of the slowdown, the new West German Grand Coalition government abandoned Erhard's broad laissez-faire
orientation. The new minister for economics, Karl Schiller
, argued strongly for legislation that would give the federal government and his ministry greater authority to guide economic policy. In 1967 the Bundestag passed the Law for Promoting Stability and Growth, known as the Magna Carta
of medium-term economic management. 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. The law also set a number of optimistic targets for the four basic standards by which West German economic success was henceforth to be measured: currency stability, economic growth, employment levels, and trade balance. Those standards became popularly known as the magisches Viereck, the "magic rectangle" or the "magic polygon."
Schiller followed a different concept from Erhard's. 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.
Schiller's success in the Grand Coalition helped to give the SPD an electoral victory in 1969 and a chance to form a new coalition government with the Free Democratic Party
(Freie Demokratische Partei—FDP) under Willy Brandt
. The SPD-FDP coalition expanded the West German social security system, substantially increasing the size and cost of the social budget. 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). This came back to haunt Schiller as well as every German government since then. Schiller himself had to resign in 1972 when the West German and global economies were in a downturn and when all his ideas did not seem able to revive West German prosperity. Willy Brandt himself resigned two years later.
Helmut Schmidt
, Brandt's successor, was intensely interested in economics but also faced great problems, including the dramatic upsurge in oil prices of 1973-74. West Germany's GDP in 1975 fell by 1.4 percent (in constant prices), the first time since the founding of the FRG that it had fallen so sharply. The West German trade balance also fell as global demand declined and as the terms of trade deteriorated because of the rise in petroleum prices.
By 1976 the worst was over. West German growth resumed, and the inflation rate began to decline. Although neither reached the favorable levels that had come to be taken for granted during the 1950s and early 1960s, they were accepted as tolerable after the turbulence of the previous years. Schmidt began to be known as a Macher (achiever), and the government won reelection in 1976. Schmidt's success led him and his party to claim that they had built Modell Deutschland (the German model).
But the economy again turned down and, despite efforts to stimulate growth by government deficits, failed to revive quickly. It was only by mid-1978 that Schmidt and the Bundesbank were able to bring the economy into balance. After that, the economy continued expanding through 1979 and much of 1980, helping Schmidt win reelection in 1980. But the upturn proved to be uneven and unrewarding, as the problems of the mid-1970s rapidly returned. By early 1981, Schmidt faced the worst possible situation: growth fell and unemployment rose, but inflation did not abate.
By the fall of 1982, Schmidt's coalition government collapsed as the FDP withdrew to join a coalition led by Helmut Kohl, the leader of the CDU/CSU. He began to direct what was termed die Wende (the turning or the reversal). The government proceeded to implement new policies to reduce the government role in the economy and within a year won a popular vote in support of the new course.
Within its broad policy, the new government had several main objectives: to reduce the federal deficit by cutting expenditures as well as taxes, to reduce government restrictions and regulations, and to improve the flexibility and performance of the labor market. 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. Through all these steps, the state role in the West German economy declined from 52 percent to 46 percent of GDP between 1982 and 1990, according to Bundesbank statistics.
Although the policies of die Wende changed the mood of the West German economy and reinstalled a measure of confidence, progress came unevenly and haltingly. During most of the 1980s, the figures on growth and inflation improved but slowly, and the figures on unemployment barely moved at all. There was little job growth until the end of the decade. When the statistics did change, however, even modestly, it was at least in the right direction.
Nonetheless, it also remained true that West German growth did not again reach the levels that it had attained in the early years of the Federal Republic. There had been a decline in the growth rate since the 1950s, an upturn in unemployment since the 1960s, and a gradual increase in inflation except during or after a severe downturn.
Global economic statistics also showed a decline in West German output and vitality. They showed that the West German share of total world production had grown from 6.6 percent in 1965 to 7.9 percent by 1975. Twelve years later, in 1987, however, it had fallen to 7.4 percent, largely because of the more rapid growth of Japan and other Asian states. Even adding the estimated GDP of the former East Germany at its peak before unification would not have brought the all-German share above 8.2 percent by 1989 and would leave all of Germany with barely a greater share of world production than West Germany alone had reached fifteen years earlier.
It was only in the late 1980s that West Germany's economy finally began to grow more rapidly. The growth rate for West German GDP rose to 3.7 percent in 1988 and 3.6 percent in 1989, the highest levels of the decade. The unemployment rate also fell to 7.6 percent in 1989, despite an influx of workers from abroad. Thus, the results of the late 1980s appeared to vindicate the West German supply-side revolution. Tax rate reductions had led to greater vitality and revenues. Although the cumulative public-sector deficit had gone above the DM1 trillion level, the public sector was growing more slowly than before.
The year 1989 was the last year of the West German economy as a separate and separable institution. From 1990 the positive and negative distortions generated by German reunification
set in, and the West German economy began to reorient itself toward economic and political union with what had been East Germany. The economy turned gradually and massively from its primarily West European and global orientation toward an increasingly intense concentration on the requirements and the opportunities of unification.
The old industrial centers of the Rhineland and North Germany lagged as well, as the coal and steel industries faded in importance. The economic policies were heavily oriented toward the world market, and the export sector continued very strong..
Germany
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
and World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
. Devastated by World War II, West Germany became an "economic miracle" in the 1950s and 1960s with the help of the Marshall Plan
Marshall Plan
The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...
. Currently it is the largest individual economy in the EU with GDP of roughly 3 trillion USD .
Middle Ages
Medieval Germany
Medieval Germany
Medieval Germany:*Carolingian Empire *East Francia *Kingdom of Germany *German Late Middle Ages...
, lying on the open Northern European Plain, was divided into hundreds of contending kingdoms, principalities, dukedoms, bishoprics, and free cities. Economic survival in that environment, like political or even physical survival, did not mean expanding across unlimited terrain, as in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. It meant a constant struggle that required collaboration with some, competition with others, and an intimate understanding among government, commerce, and production. A desire to save was also born in the German experience of political, military, and economic uncertainty.
Towns and cities
The German lands had a population of about 5 or 6 million. The great majority were farmers, typically in a state of serfdomSerfdom
Serfdom is the status of peasants under feudalism, specifically relating to Manorialism. It was a condition of bondage or modified slavery which developed primarily during the High Middle Ages in Europe and lasted to the mid-19th century...
under the control of nobles and monasteries. A few towns were starting to emerge. From 1100, new towns were founded around imperial strongholds, castles, bishops' palaces and monasteries. The towns began to establish municipal rights and liberties (see German town law
German town law
German town law or German municipal concerns concerns town privileges used by many cities, towns, and villages throughout Central and Eastern Europe during the Middle Ages.- Town law in Germany :...
). Several cities such as Cologne
Cologne
Cologne is Germany's fourth-largest city , and is the largest city both in the Germany Federal State of North Rhine-Westphalia and within the Rhine-Ruhr Metropolitan Area, one of the major European metropolitan areas with more than ten million inhabitants.Cologne is located on both sides of the...
became Imperial Free Cities, which did not depend on princes or bishops, but were immediately subject to the Emperor. The towns were ruled by patricians (merchants carrying on long-distance trade). The craftsmen formed guilds, governed by strict rules, which sought to obtain control of the towns; a few were open to women. Society was divided into sharply demarcated classes: the clergy, physicians, merchants, various guilds of artisans; full citizenship was not available to paupers. Political tensions arose from issues of taxation, public spending, regulation of business, and market supervision, as well as the limits of corporate autonomy.
Cologne's
History of Cologne
The History of Cologne, Germany's oldest major city, can be broken into several periods.- Roman period :In 39 BC, the tribe of the Ubii entered into an agreement with the Roman forces and settled on the left bank of the Rhine. Their headquarters was Oppidum Ubiorum — the settlement of the Ubii, and...
central location on the Rhine river placed it at the intersection of the major trade routes between east and west and was the basis of Cologne's growth. The economic structures of medieval and early modern Cologne were characterized by the city's status as a major harbor and transport hub upon the Rhine. It was governed by its burghers.
Hanseatic League
Long-distance trade in the Baltic intensified, as the major trading towns came together in the Hanseatic LeagueHanseatic League
The Hanseatic League was an economic alliance of trading cities and their merchant guilds that dominated trade along the coast of Northern Europe...
, under the leadership of Lübeck
Lübeck
The Hanseatic City of Lübeck is the second-largest city in Schleswig-Holstein, in northern Germany, and one of the major ports of Germany. It was for several centuries the "capital" of the Hanseatic League and, because of its Brick Gothic architectural heritage, is listed by UNESCO as a World...
.
Northern Europe
Northern Europe is the northern part or region of Europe. Northern Europe typically refers to the seven countries in the northern part of the European subcontinent which includes Denmark, Estonia, Latvia, Lithuania, Norway, Finland and Sweden...
and flourished from the 1200 to 1500, and continued with lesser importance after that. The chief cities were Cologne
History of Cologne
The History of Cologne, Germany's oldest major city, can be broken into several periods.- Roman period :In 39 BC, the tribe of the Ubii entered into an agreement with the Roman forces and settled on the left bank of the Rhine. Their headquarters was Oppidum Ubiorum — the settlement of the Ubii, and...
on the Rhine River, Hamburg
History of Hamburg
The history the Hamburg begins with its foundation in the 9th century as a mission settlement to convert the Saxons. Since the Middle Ages Hamburg was an important trading centre in Europe...
and Bremen
Bremen
The City Municipality of Bremen is a Hanseatic city in northwestern Germany. A commercial and industrial city with a major port on the river Weser, Bremen is part of the Bremen-Oldenburg metropolitan area . Bremen is the second most populous city in North Germany and tenth in Germany.Bremen is...
on the North Sea, and Lübeck on the Baltic.
The Hanseatic cities each had its own legal system and a degree of political autonomy.
Thirty Years War, 1618-1648
The(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. The fighting often was out of control, with marauding bands of hundreds or thousands of starving soldiers spreading plague, plunder, and murder. The armies that were under control moved back and forth across the countryside year after year, levying heavy taxes on cities, and seizing the animals and food stocks of the peasants without payment. The enormous social disruption over three decades caused a dramatic decline in population because of killings, disease, crop failures, declining birth rates and random destruction, and the out-migration of terrified people. One estimate shows a 38% drop from 16 million people in 1618 to 10 million by 1650, while another shows "only" a 20% drop from 20 million to 16 million. The AltmarkAltmark
The Altmark is a historic region in Germany, comprising the northern third of Saxony-Anhalt. As the initial territory of the Brandenburg margraves, it is sometimes referred to as the "Cradle of Prussia", as by Otto von Bismarck, a native from Schönhausen near Stendal.- Geography :The Altmark is...
and Württemberg
History of Württemberg
Württemberg developed as a political entity in south-west Germany, with the core established around Stuttgart by Count Conrad . His descendants managed to expand Württemberg, surviving Germany's religious wars, changes in imperial policy, and invasions from France. The state had a basic...
regions especially hard hit. It took generations for Germany to fully recover.
Peasants and rural life
Peasants continued to center their lives in the village, where they were members of a corporate body and help manage the community resources and monitor the community life. Across Germany and especially in the east, they were serfs who were bound prominently to parcels of land. In most of Germany, farming was handled by tenant farmers who paid rents and obligatory services to the landlord, who was typically a nobleman. Peasant leaders supervised the fields and ditches and grazing rights, maintained public order and morals, and supported a village court which handled minor offenses. Inside the family the patriarch made all the decisions, and tried to arrange advantageous marriages for his children. Much of the villages' communal life centered around church services and holy days. In Prussia, the peasants drew lots to choose conscripts required by the army. The noblemen handled external relationships and politics for the villages under their control, and were not typically involved in daily activities or decisions.The emancipation of the serfs came in 1770-1830, beginning with Schleswig in 1780. 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. They could also sell the land they already owned. The edict applied to all peasants whose holdings were above a certain size, and included both Crown lands and noble estates. The peasants were freed from the obligation of personal services to the lord and annual dues. A bank was set up so that landowner could borrow government money to buy land from peasants (the peasants were not allowed to use it to borrow money to buy land until 1850). The result was that the large landowners obtained larger estates, and many peasant became landless tenants, or moved to the cities or to America. The other German states imitated Prussia after 1815. In sharp contrast to the violence that characterized land reform in the French Revolution, Germany handled it peacefully. In Schleswig the peasants, who had been influenced by the Enlightenment, played an active role; elsewhere they were largely passive. Indeed, for most peasants, customs and traditions continued largely unchanged, including the old habits of deference to the nobles whose legal authority remains quite strong over the villagers. Although the peasants were no longer tied to the same land like serfs had been, the old paternalistic relationship in East Prussia lasted into the 20th century..
Industrial revolution
Before 1850 Germany lagged far behind the leaders in industrial development, Britain, France and Belgium. By midcentury, however, the German states were catching up, and by 1900 Germany was a world leader in industrialization, along with Britain and the United States. In 1800, Germany's social structure was poorly suited to entrepreneurship or economic development. Domination by 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. Nevertheless, traditionalism remained strong in most of Germany. Until midcentury, the guilds, the landed aristocracy, the churches, and the government bureaucracies had so many rules and restrictions that entrepreneurship was held in low esteem, and given little opportunity to develop. 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 beginnings of the industrial revolution in Germany came in the textile industry, and was facilitated by eliminating tariff barriers through the Zollverein, starting in 1834. 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 manager, increased the demand for engineers, architects and skilled machinists and stimulated investments in coal and iron. The political decisions about the economy of Prussia (and after 1871 all 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.Regions
The north German states were for the most part richer in natural resources than the southern states. They had vast agricultural tracts from Schleswig-HolsteinSchleswig-Holstein
Schleswig-Holstein is the northernmost of the sixteen states of Germany, comprising most of the historical duchy of Holstein and the southern part of the former Duchy of Schleswig...
in the west through Prussia in the east. They also had coal and iron in the Ruhr Valley. Through the practice of primogeniture
Primogeniture
Primogeniture is the right, by law or custom, of the firstborn to inherit the entire estate, to the exclusion of younger siblings . Historically, the term implied male primogeniture, to the exclusion of females...
, widely followed in northern Germany, large estates and fortunes grew. So did close relations between their owners and local as well as national governments.
The south German states were relatively poor in natural resources and those Germans therefore engaged more often in small economic enterprises. They also had no primogeniture rule but subdivided the land among several offspring, leading those offspring to remain in their native towns but not fully able to support themselves from their small parcels of land. The south German states, therefore, fostered cottage industries, crafts, and a more independent and self-reliant spirit less closely linked to the government.
Banks and cartels
German banks played central roles in financing German industry. They also shaped industrywide producer cooperatives, known as cartels (Konzerne). Different banks formed cartels in different industries. Cartel contracts were accepted as legal and binding by German courts although they were held to be illegal in Britain and the United States.The first German cartel was a salt cartel, the Neckar Salt Union of 1828, formed in Württemberg
Württemberg
Württemberg , formerly known as Wirtemberg or Wurtemberg, is an area and a former state in southwestern Germany, including parts of the regions Swabia and Franconia....
and Baden
Baden
Baden is a historical state on the east bank of the Rhine in the southwest of Germany, now the western part of the Baden-Württemberg of Germany....
. The process of cartelization began slowly, but the cartel movement took hold after 1873 in the economic depression that followed the postunification speculative bubble. It began in heavy industry and spread throughout other industries. By 1900 there were 275 cartels in operation; by 1908, over 500. By some estimates, different cartel arrangements may have numbered in the thousands at different times, but many German companies stayed outside the cartels because they did not welcome the restrictions that membership imposed.
The government played a powerful role in the industrialization of the German Empire
German Empire
The German Empire refers to Germany during the "Second Reich" period from the unification of Germany and proclamation of Wilhelm I as German Emperor on 18 January 1871, to 1918, when it became a federal republic after defeat in World War I and the abdication of the Emperor, Wilhelm II.The German...
founded by Otto von Bismarck
Otto von Bismarck
Otto Eduard Leopold, Prince of Bismarck, Duke of Lauenburg , simply known as Otto von Bismarck, was a Prussian-German statesman whose actions unified Germany, made it a major player in world affairs, and created a balance of power that kept Europe at peace after 1871.As Minister President of...
in 1871 during a period known as the Second Industrial Revolution
Second Industrial Revolution
The Second Industrial Revolution, also known as the Technological Revolution, was a phase of the larger Industrial Revolution corresponding to the latter half of the 19th century until World War I...
. It supported not only heavy industry but also crafts and trades because it wanted to maintain prosperity in all parts of the empire. Even where the national government did not act, the highly autonomous regional and local governments supported their own industries. Each state tried to be as self-sufficient as possible.
Despite the several ups and downs of prosperity and depression that marked the first decades of the German Empire, the ultimate wealth of the empire proved immense. German aristocrats, landowners, bankers, and producers created what might be termed the first German economic miracle, the turn-of-the-century surge in German industry and commerce during which bankers, industrialists, mercantilists, the military, and the monarchy joined forces.
Class and the welfare state
Germany's middle-class, based in the cities, grew exponentially, although it never gained the political power it had in France, Britain or the United States. The Association of German Women's Organizations (BDF) was established in 1894 to encompass the proliferating women's organizations that had sprung up since the 1860s. From the beginning the BDF was a bourgeois organization, its members working toward equality with men in such areas as education, financial opportunities, and political life. Working-class women were not welcome; they were organized by the Socialists.Bismark built on a tradition of welfare programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s he introduced old age pensions, accident insurance, medical care and unemployment insurance that formed the basis of the modern European welfare state. His paternalistic programs won the support of German industry because its goals were to win the support of the working classes for the Empire and reduce the outflow of immigrants to America, where wages were higher but welfare did not exist. 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.
Railways
Political disunity of three dozen states and a pervasive conservatism made it difficult to build railways in the 1830s. However, by the 1840s, trunk lines did link the major cities; each German state was responsible for the lines within its own borders. Economist Friedrich ListFriedrich List
Georg Friedrich List was a leading 19th century German economist who developed the "National System" or what some would call today the National System of Innovation...
summed up the advantages to be derived from the development of the railway system in 1841:
- 1) as a means of national defence, it facilitates the concentration, distribution and direction of the army.
2) It is a means to the improvement of the culture of the nation…. It brings talent, knowledge and skill of every kind readily to market.
3) It secures the community against dearth and famine, and against excessive fluctuation in the prices of the necessaries of life.
4) It promotes the spirit of the nation, as it has a tendency to destroy the Philistine spirit arising from isolation and provincial prejudice and vanity. It binds nations by ligaments, and promotes an interchange of food and of commodities, thus making it feel to be a unit. The iron rails become a nerve system, which, on the one hand, strengthens public opinion, and, on the other hand, strengthens the power of the state for police and governmental purposes.
Lacking a technological base at first, the Germans imported their engineering and hardware from Britain, but quickly learned the skills needed to operate and expand the railways. In many cities, the new railway shops were the centres of technological awareness and training, so that by 1850, Germany was self-sufficient in meeting the demands of railroad construction, and the railways were a major impetus for the growth of the new steel industry. Observers found that even as late as 1890, their engineering was inferior to Britain’s. However, German unification in 1870 stimulated consolidation, nationalisation into state-owned companies, and further rapid growth. Unlike the situation in France, the goal was support of industrialisation, and so heavy lines crisscrossed the Ruhr and other industrial districts, and provided good connections to the major ports of Hamburg and Bremen. By 1880, Germany had 9,400 locomotives pulling 43,000 passengers and 30,000 tons of freight, and pulled ahead of France
Agriculture
Perkins (1981) argues that more important than Bismarck's new tariff on imported grain was the introduction of the sugar beet as a main crop. Famers quickly abandoned traditional, inefficient practices for modern new methods, including use of new fertilizers and new tools. The knowledge and tools gained from the intensive farming of sugar and other root crops made Germany the most efficient agricultural producer in Europe by 1914. Even so farms were small in size, and women did much of the field work. An unintended consequence was the increased dependence on migratory, especially foreign, labor.Chemicals
The economy continued to industrialize and urbanize, with heavy industry (coal and steel especially) becoming important in the Ruhr, and manufacturing growing in the cities, the Ruhr, and Silesia. Based on its leadership in chemical research in the universities and industrial laboratories, Germany became dominant in the world's chemical industry in the late 19th century. At first the production of dyes was critical.Steel
Germany became Europe's leading steel-producing nations in the late 19th century. The "German Steel Federation" was established in 1874.20th century
From the prosperity of the empire during the Wilhelmine era (1890-1914), Germany plunged into World War IWorld War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
, a war it was to lose and one that spawned many of the economic crises that would destroy the successor Weimar Republic
Weimar Republic
The Weimar Republic is the name given by historians to the parliamentary republic established in 1919 in Germany to replace the imperial form of government...
. British economist John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
denounced the 1919 Treaty of Versailles
Treaty of Versailles
The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...
as ruinous to German and global prosperity. The war and the treaty were followed by the Great Inflation of the early 1920s that wreaked havoc on Germany's social structure and political stability. During that inflation, the value of the nation's currency, the Papiermark
German papiermark
The name Papiermark is applied to the German currency from the 4th August 1914 when the link between the Mark and gold was abandoned, due to the outbreak of World War I...
, collapsed from 8.9 per US$1 in 1918 to 4.2 trillion per US$1 by November 1923. Then, after a brief period of prosperity during the mid-1920s, came the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, which fostered the social insurrection that fascist candidate Adolf Hitler
Adolf Hitler
Adolf Hitler was an Austrian-born German politician and the leader of the National Socialist German Workers Party , commonly referred to as the Nazi Party). He was Chancellor of Germany from 1933 to 1945, and head of state from 1934 to 1945...
capitalized on in order to win the 1933 election for German Chancellor.
Nazi economy
During the Hitler era (1933-45), the economy developed a hothouse prosperity, supported with high government subsidies to those sectors that tended to give Germany military power and economic autarky
Autarky
Autarky is the quality of being self-sufficient. Usually the term is applied to political states or their economic policies. Autarky exists whenever an entity can survive or continue its activities without external assistance. Autarky is not necessarily economic. For example, a military autarky...
, that is, economic independence from the global economy. During the war itself the German economy was sustained by the exploitation of conquered territories and peoples
Forced labor in Germany during World War II
The use of forced labour in Nazi Germany and throughout German-occupied Europe during World War II took place on an unprecedented scale. It was a vital part of the German economic exploitation of conquered territories. It also contributed to the mass extermination of populations in German-occupied...
. With the loss of the war, the country entered into the period known as Stunde Null
Stunde Null
Stunde Null is the German language equivalent of "zero hour", a military planning term indicating the beginning of some operation or event. Historically, Stunde Null specifically refers to the capitulation of the Nazi government on May 8, 1945, at midnight, marking the end of World War II in Germany...
("Zero Hour"), when Germany lay in ruins and the society had to be rebuilt from scratch.
Post-World War II
The first several years after World War II were years of bitter penury for the Germans. Seven million forced laborers left for their own land, but about 14 million Germans came in from the East, living for years in dismal camps. It took nearly a decade for all the German POWs to return. In the West, farm production fell, food supplies were cut off from eastern Germany (controlled by the Soviets) and food shipments extorted from conquered lands ended. The standard of living fell to levels not seen in a century, and food was always in short supply. High inflation made savings (and debts) lose 99% of their value, while the black market distorted the economy. In the East, the Soviets crushed dissent and imposed another police state, often employing ex-Nazis in the dreaded Stasi. The Soviets extracted about 23% of the East German GNP for reparations, while in the West reparations were a minor factor.The man who took full advantage of Germany's postwar opportunity was Ludwig Erhard
Ludwig Erhard
Ludwig Wilhelm Erhard was a German politician affiliated with the CDU and Chancellor of West Germany from 1963 until 1966. He is notable for his leading role in German postwar economic reform and economic recovery , particularly in his role as Minister of Economics under Chancellor Konrad Adenauer...
, who was determined to shape a new and different kind of German economy. He was given his chance by United States officials, who found him working in Nuremberg
Nuremberg
Nuremberg[p] is a city in the German state of Bavaria, in the administrative region of Middle Franconia. Situated on the Pegnitz river and the Rhine–Main–Danube Canal, it is located about north of Munich and is Franconia's largest city. The population is 505,664...
and who saw that many of his ideas coincided with their own. A PhD in economics, he was influenced by the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
.
Erhard's first step was currency reform: the abolition of the Reichsmark
German reichsmark
The Reichsmark was the currency in Germany from 1924 until June 20, 1948. The Reichsmark was subdivided into 100 Reichspfennig.-History:...
and the creation of a new currency, the Deutsche Mark
German mark
The Deutsche Mark |mark]], abbreviated "DM") was the official currency of West Germany and Germany until the adoption of the euro in 2002. It is commonly called the "Deutschmark" in English but not in German. Germans often say "Mark" or "D-Mark"...
. He carried out that reform on 21 June 1948, installing the new currency with the concurrence of the Western Allies but also taking advantage of the opportunity to abolish most Nazi
Nazism
Nazism, the common short form name of National Socialism was the ideology and practice of the Nazi Party and of Nazi Germany...
and occupation rules and regulations in order to establish the genesis of a free economy. The currency reform, whose purpose was to provide a respected store of value and a widely accepted legal tender, succeeded brilliantly. It established the foundations of the West German economy and of the West German state
West Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
Productivity improves
After 1950, Germany overtook Britain in comparative productivity levels for the whole economy, primarily as a result of trends in services rather than trends in industry. The Marshall PlanMarshall Plan
The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...
was eagerly adopted in Germany as a way to modernize business procedures and utilize the best practices, while these changes were resisted in Britain. Britain's historic lead in productivity of its services sector was based on external economies of scale in a highly urbanized economy with an international orientation. On the other hand the low productivity in Germany was caused by the underdevelopment of services generally, especially in rural areas that comprised a much larger sector. As German farm employment declined sharply after 1950 thanks to mechanization, catching-up occurred in services. 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.
The social market economy
The Germans proudly label their economy a "soziale Marktwirtschaft," or "social market economySocial market economy
The social market economy is the main economic model used in West Germany after World War II. It is based on the economic philosophy of Ordoliberalism from the Freiburg School...
," to show that the system as it has developed after World War II has both a material and a social—or human—dimension. They stress the importance of the term "market" because after the Nazi experience they wanted an economy free of state intervention and domination. The only state role in the new West German economy was to protect the competitive environment from monopolistic or oligopolistic tendencies—including its own. The term "social" is stressed because West Germans wanted an economy that would not only help the wealthy but also care for the workers and others who might not prove able to cope with the strenuous competitive demands of a market economy. The term "social" was chosen rather than "socialist" to distinguish their system from those in which the state claimed the right to direct the economy or to intervene in it.
Beyond these principles of the social market economy, but linked to it, comes a more traditional German concept, that of Ordnung
Ordnung
The Ordnung is a set of rules for Amish and Old Order Mennonite living. Ordnung is the German word for order, arrangement, organization, or system. Because the Amish have no central church government, each assembly is autonomous and is its own governing authority...
, which can be directly translated to mean order but which really means an economy, society, and policy that are structured but not dictatorial. The founders of the social market economy insisted that Denken in Ordnungen—to think in terms of systems of order—was essential. They also spoke of Ordo-Liberalismus because the essence of the concept is that this must be a freely chosen order, not a command order.
Over time, the term "social" in the social market economy began to take on a life of its own. It moved the West German economy toward an extensive social welfare system that has become one of the most expensive in the world. Moreover, the West German federal government and the states (Länder ; sing., 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. In an even greater departure from the Erhard tradition, the government became an instrument for the preservation of existing industries rather than a force for renewal. In the 1970s, the state assumed an ever more important role in the economy. During the 1980s, Chancellor Helmut Kohl
Helmut Kohl
Helmut Josef Michael Kohl is a German conservative politician and statesman. He was Chancellor of Germany from 1982 to 1998 and the chairman of the Christian Democratic Union from 1973 to 1998...
tried to reduce that state role, and he succeeded in part, but German unification again compelled the German government to assume a stronger role in the economy. Thus, the contradiction between the terms "social" and "market" has remained an element for debate in Germany.
Given the internal contradiction in its philosophy, the German economy is both conservative and dynamic. It is conservative in the sense that it draws on the part of the German tradition that envisages some state role in the economy and a cautious attitude toward investment and risk-taking. It is dynamic in the sense that it is directed toward growth—even if that growth may be slow and steady rather than spectacular. It tries to combine the virtues of a market system with the virtues of a social welfare system.
The economic miracle and beyond
The economic reforms and the new West German system received powerful support from a number of sources: investment funds under the European Recovery Program, more commonly known as the Marshall PlanMarshall Plan
The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...
; the stimulus to German industry provided by the diversion of other Western resources for Korean War
Korean War
The Korean War was a conventional war between South Korea, supported by the United Nations, and North Korea, supported by the People's Republic of China , with military material aid from the Soviet Union...
production; and the German readiness to work hard for low wages until productivity had risen. But the essential component of success was the revival of confidence brought on by Erhard's reforms and by the new currency.
The West German boom that began in 1950 was truly memorable. The growth rate of industrial production was 25.0 percent in 1950 and 18.1 percent in 1951. Growth continued at a high rate for most of the 1950s, despite occasional slowdowns. By 1960 industrial production had risen to two-and-one-half times the level of 1950 and far beyond any that the Nazis had reached during the 1930s in all of Germany. GDP rose by two-thirds during the same decade. The number of persons employed rose from 13.8 million in 1950 to 19.8 million in 1960, and the unemployment rate fell from 10.3 percent to 1.2 percent.
Labor also benefited in due course from the boom. Although wage demands and pay increases had been modest at first, wages and salaries rose over 80 percent between 1949 and 1955, catching up with growth. West German social programs were given a considerable boost in 1957, just before a national election, when the government decided to initiate a number of social programs and to expand others.
In 1957 West Germany gained a new central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
, the Deutsche Bundesbank
Deutsche Bundesbank
The Deutsche Bundesbank is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks . Due to its strength and former size, the Bundesbank is the most influential member of the ESCB. Both the Deutsche Bundesbank and the European Central Bank are...
, generally called simply the Bundesbank, which succeeded the Bank Deutscher Länder and was given much more authority over monetary policy. That year also saw the establishment of the Bundeskartellamt
Bundeskartellamt
The Federal Cartel Office is Germany's national competition regulator. It was first established in 1958 and comes under the authority of the Federal Ministry of the Economy and Technology. Its headquarters are in the former West German capital, Bonn and its President is Andreas Mundt, who has a...
(Federal Cartel Office), designed to prevent the return of German monopolies and cartels. Six years later, in 1963, the Bundestag
Bundestag
The Bundestag is a federal legislative body in Germany. In practice Germany is governed by a bicameral legislature, of which the Bundestag serves as the lower house and the Bundesrat the upper house. The Bundestag is established by the German Basic Law of 1949, as the successor to the earlier...
, the lower house of Germany's parliament, at Erhard's urging established the Council of Economic Experts to provide objective evaluations on which to base German economic policy.
The West German economy did not grow as fast or as consistently in the 1960s as it had during the 1950s, in part because such a torrid pace could not be sustained, in part because the supply of fresh labor from East Germany was cut off by the Berlin Wall
Berlin Wall
The Berlin Wall was a barrier constructed by the German Democratic Republic starting on 13 August 1961, that completely cut off West Berlin from surrounding East Germany and from East Berlin...
, built in 1961, and in part because the Bundesbank became disturbed about potential overheating and moved several times to slow the pace of growth. Erhard, who had succeeded Konrad Adenauer
Konrad Adenauer
Konrad Hermann Joseph Adenauer was a German statesman. He was the chancellor of the West Germany from 1949 to 1963. He is widely recognised as a person who led his country from the ruins of World War II to a powerful and prosperous nation that had forged close relations with old enemies France,...
as chancellor, was voted out of office in December 1966, largely—although not entirely—because of the economic problems of the Federal Republic. He was replaced by the Grand Coalition consisting of the Christian Democratic Union
Christian Democratic Union (Germany)
The Christian Democratic Union of Germany is a Christian democratic and conservative political party in Germany. It is regarded as on the centre-right of the German political spectrum...
(Christlich Demokratische Union—CDU), its sister party the Christian Social Union
Christian Social Union of Bavaria
The Christian Social Union in Bavaria is a Christian democratic and conservative political party in Germany. It operates only in the state of Bavaria, while its sister party, the Christian Democratic Union , operates in the other 15 states of Germany...
(Christlich-Soziale Union—CSU), and the Social Democratic Party of Germany
Social Democratic Party of Germany
The Social Democratic Party of Germany is a social-democratic political party in Germany...
(Sozialdemokratische Partei Deutschlands—SPD) under Chancellor Kurt Georg Kiesinger
Kurt Georg Kiesinger
Kurt Georg Kiesinger was a German politician affiliated with the CDU and Chancellor of West Germany from 1 December 1966 until 21 October 1969.-Early career and wartime activities:...
of the CDU.
Under the pressure of the slowdown, the new West German Grand Coalition government abandoned Erhard's broad laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
orientation. The new minister for economics, Karl Schiller
Karl Schiller
Karl August Fritz Schiller was a German scientist and politician of the Social Democratic Party . From 1966 to 1972, he was Federal Minister of Economic Affairs and from 1971 to 1972 Federal Minister of Finance...
, argued strongly for legislation that would give the federal government and his ministry greater authority to guide economic policy. In 1967 the Bundestag passed the Law for Promoting Stability and Growth, known as the Magna Carta
Magna Carta
Magna Carta is an English charter, originally issued in the year 1215 and reissued later in the 13th century in modified versions, which included the most direct challenges to the monarch's authority to date. The charter first passed into law in 1225...
of medium-term economic management. 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. The law also set a number of optimistic targets for the four basic standards by which West German economic success was henceforth to be measured: currency stability, economic growth, employment levels, and trade balance. Those standards became popularly known as the magisches Viereck, the "magic rectangle" or the "magic polygon."
Schiller followed a different concept from Erhard's. 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.
Schiller's success in the Grand Coalition helped to give the SPD an electoral victory in 1969 and a chance to form a new coalition government with the Free Democratic Party
Free Democratic Party (Germany)
The Free Democratic Party , abbreviated to FDP, is a centre-right classical liberal political party in Germany. It is led by Philipp Rösler and currently serves as the junior coalition partner to the Union in the German federal government...
(Freie Demokratische Partei—FDP) under Willy Brandt
Willy Brandt
Willy Brandt, born Herbert Ernst Karl Frahm , was a German politician, Mayor of West Berlin 1957–1966, Chancellor of West Germany 1969–1974, and leader of the Social Democratic Party of Germany 1964–1987....
. The SPD-FDP coalition expanded the West German social security system, substantially increasing the size and cost of the social budget. 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). This came back to haunt Schiller as well as every German government since then. Schiller himself had to resign in 1972 when the West German and global economies were in a downturn and when all his ideas did not seem able to revive West German prosperity. Willy Brandt himself resigned two years later.
Helmut Schmidt
Helmut Schmidt
Helmut Heinrich Waldemar Schmidt is a German Social Democratic politician who served as Chancellor of West Germany from 1974 to 1982. Prior to becoming chancellor, he had served as Minister of Defence and Minister of Finance. He had also served briefly as Minister of Economics and as acting...
, Brandt's successor, was intensely interested in economics but also faced great problems, including the dramatic upsurge in oil prices of 1973-74. West Germany's GDP in 1975 fell by 1.4 percent (in constant prices), the first time since the founding of the FRG that it had fallen so sharply. The West German trade balance also fell as global demand declined and as the terms of trade deteriorated because of the rise in petroleum prices.
By 1976 the worst was over. West German growth resumed, and the inflation rate began to decline. Although neither reached the favorable levels that had come to be taken for granted during the 1950s and early 1960s, they were accepted as tolerable after the turbulence of the previous years. Schmidt began to be known as a Macher (achiever), and the government won reelection in 1976. Schmidt's success led him and his party to claim that they had built Modell Deutschland (the German model).
But the economy again turned down and, despite efforts to stimulate growth by government deficits, failed to revive quickly. It was only by mid-1978 that Schmidt and the Bundesbank were able to bring the economy into balance. After that, the economy continued expanding through 1979 and much of 1980, helping Schmidt win reelection in 1980. But the upturn proved to be uneven and unrewarding, as the problems of the mid-1970s rapidly returned. By early 1981, Schmidt faced the worst possible situation: growth fell and unemployment rose, but inflation did not abate.
By the fall of 1982, Schmidt's coalition government collapsed as the FDP withdrew to join a coalition led by Helmut Kohl, the leader of the CDU/CSU. He began to direct what was termed die Wende (the turning or the reversal). The government proceeded to implement new policies to reduce the government role in the economy and within a year won a popular vote in support of the new course.
Within its broad policy, the new government had several main objectives: to reduce the federal deficit by cutting expenditures as well as taxes, to reduce government restrictions and regulations, and to improve the flexibility and performance of the labor market. 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. Through all these steps, the state role in the West German economy declined from 52 percent to 46 percent of GDP between 1982 and 1990, according to Bundesbank statistics.
Although the policies of die Wende changed the mood of the West German economy and reinstalled a measure of confidence, progress came unevenly and haltingly. During most of the 1980s, the figures on growth and inflation improved but slowly, and the figures on unemployment barely moved at all. There was little job growth until the end of the decade. When the statistics did change, however, even modestly, it was at least in the right direction.
Nonetheless, it also remained true that West German growth did not again reach the levels that it had attained in the early years of the Federal Republic. There had been a decline in the growth rate since the 1950s, an upturn in unemployment since the 1960s, and a gradual increase in inflation except during or after a severe downturn.
Global economic statistics also showed a decline in West German output and vitality. They showed that the West German share of total world production had grown from 6.6 percent in 1965 to 7.9 percent by 1975. Twelve years later, in 1987, however, it had fallen to 7.4 percent, largely because of the more rapid growth of Japan and other Asian states. Even adding the estimated GDP of the former East Germany at its peak before unification would not have brought the all-German share above 8.2 percent by 1989 and would leave all of Germany with barely a greater share of world production than West Germany alone had reached fifteen years earlier.
It was only in the late 1980s that West Germany's economy finally began to grow more rapidly. The growth rate for West German GDP rose to 3.7 percent in 1988 and 3.6 percent in 1989, the highest levels of the decade. The unemployment rate also fell to 7.6 percent in 1989, despite an influx of workers from abroad. Thus, the results of the late 1980s appeared to vindicate the West German supply-side revolution. Tax rate reductions had led to greater vitality and revenues. Although the cumulative public-sector deficit had gone above the DM1 trillion level, the public sector was growing more slowly than before.
The year 1989 was the last year of the West German economy as a separate and separable institution. From 1990 the positive and negative distortions generated by German reunification
German reunification
German reunification was the process in 1990 in which the German Democratic Republic joined the Federal Republic of Germany , and when Berlin reunited into a single city, as provided by its then Grundgesetz constitution Article 23. The start of this process is commonly referred by Germans as die...
set in, and the West German economy began to reorient itself toward economic and political union with what had been East Germany. The economy turned gradually and massively from its primarily West European and global orientation toward an increasingly intense concentration on the requirements and the opportunities of unification.
German reunification and its aftermath
Germany invested over $2 trillion marks in the rehabilitation of the former East Germany helping it to transition to a market economy, and cleaning up the environmental degradation. By 2011 the results were mixed, with continued to slow economic development in the East, in sharp contrast to the rapid economic growth in both area and southern Germany. Unemployment was much higher in the East, often over 15%. Economists Snower and Merkl (2006) suggests 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.The old industrial centers of the Rhineland and North Germany lagged as well, as the coal and steel industries faded in importance. The economic policies were heavily oriented toward the world market, and the export sector continued very strong..
Further reading
- Berghahn, Volker Rolf. Modern Germany: society, economy, and politics in the twentieth century (1987) ACLS E-book
- Böhme, Helmut. An Introduction to the Social and Economic History of Germany: Politics and Economic Change in the Nineteenth and Twentieth Centuries(1978)
- Buse, Dieter K. ed. Modern Germany: An Encyclopedia of History, People, and Culture 1871-1990 (2 vol 1998)
- Clapham, J. H. The Economic Development of France and Germany 1815-1914 (1936)
- Clark, Christopher. Iron Kingdom: The Rise and Downfall of Prussia, 1600-1947 (2006)
- Detwiler, Donald S. Germany: A Short History (3rd ed. 1999) 341pp; online edition
- Haber, Ludwig. The Chemical Industry During the Nineteenth Century: A Study of the Economic Aspect of Applied Chemistry in Europe and North America (1958); The Chemical Industry: 1900-1930 : International Growth and Technological Change (1971)
- Holborn, Hajo. A History of Modern Germany (3 vol 1959-64); vol 1: The Reformation; vol 2: 1648-1840; vol 3. 1840-1945
- Meskill, David. Optimizing the German Workforce: Labor Administration From Bismarck to the Economic Miracle (Berghahn Books; 2010) 276 pages; studies continuities in German governments' efforts to created a skilled labor force across the disparate imperial, Weimar, Nazi, and postwar regimes.
- Overy, R. J. The Nazi Economic Recovery 1932-1938 (1996) excerpt and text search
- Overy, R. J. War and Economy in the Third Reich (1994)
- Perkins, J. A. "Dualism in German Agrarian Historiography, Comparative Studies in Society & History, Apr 1986, Vol. 28 Issue 2, pp 287-330, compares large landholdings in the territories east of the Elbe river, and the West-Elbian small-scale agriculture.
- Sagarra, Eda. A Social History of Germany: 1648-1914 (1977)
- Tooze, Adam. The Wages of Destruction: The Making and Breaking of the Nazi Economy (2007), highly influential new study
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